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Full text of "Taxation and regulation of banks, savings and loan associations, and credit unions : report to the 1985 General Assembly of North Carolina"



^P-PD/MoC/L5x4vV1985/pt- 1133 i 
North Carolina. Legislative 
Research Comrri i ss i on . 

ReoortSn 




DATE 


ISSUED TO 1 



















NOT TO BE REMOVED 
FROM 



UNC LAW LIBRARY 

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North Carolina. Legislative 
Research Comr." i ss i on. 



LEGISLATIVE 
RESEARCH COMMISSION 

TAXATION AND REGULATION OF 

BANKS, SAVINGS AND LOAN 

ASSOCIATIONS, AND CREDIT UNIONS 



fv^*i!^^^'''., 




REPORT TO THE 

1985 GENERAL ASSEMBLY 

OF NORTH CAROLINA 



JAN 25 1965 



INSTITUTE C 
UNIVERSITY Cr 



A LIMITED NUMBER OF COPIES OF THIS REPORT IS AVAILABLE 
FOR DISTRIBUTION THROUGH THE LEGISLATIVE LIBRARY: 



ROOM 2126,2226 
STATE LEGISLATIVE BUILDING 
RALEIGH, NORTH CAROLINA 27611 
TELEPHONE: (919) 733-7778 



OR 



ROOM 500 

LEGISLATIVE OFFICE BUILDING 
RALEIGH, NORTH CAROLINA 27611 
TELEPHONE: (919) 733-9390 



STATE OF NORTH CAROLINA 
LEGISLATIVE RESEARCH COMMISSION 

STATE LEGISLATIVE BUILDING 
RALEIGH 27611 




December 15, 1984 



TO THE MEMBERS OF THE 19 85 GENERAL ASSEMBLY 



The 1985 Legislative Research Commission herewith reports 
to the General Assembly on the matter of the taxation and 
regulation of banks, savings and loan associations and credit 
unions. The report is made pursuant to Chapter 905 of the 1983 
General Assembly (1983 Sessions) and Section 3 of Chapter 1113 
of the 1983 General Assembly (Regular Session, 1984) . 

This report was prepared by the Legislative Research 
Commission's Committee on the Taxation and Regulation of Banks, 
Savings and Loan Associations and Credit Unions and is trans- 
mitted by the Legislative Research Commission for your consid- 
eration. 

Respectfully submitted, 
Liston B. Ramsey ^ W. Craig L^ing n 



Cochairmen 
Legislative Research Commission 



LEGISLATIVE RESEARCH COMMISSION 



Senator W. Craig Lawing, Cochairman 

Senator William N. Martin 

Senator Helen R. Marvin 

Senator William W. Staton 

Senator Joseph E. Thomas 

Senator Russell Walker 



Representative Liston B. Ramsey, Cochairman 
Representative Christopher S. Barker, Jr. 
Representative John T. Church 
Representative Bruce Ethridge 
Representative John J. Hunt 
Representative Margaret Tennille 



TABLE OF CONTENTS 

Letter of Transmitted] i 

LetjisJ ci tivo Ri-;:earch Coinniis.pion Membership ii 

PREFACE 1 

COMMITTEE PROCEEDINGS 3 

1. State Regulation of Financial Institutions Generally 4 

A. Potential State Regulation of "Cash Management 7 
Accounts" 

B. Mutual Deposit Guarantee Associations 9 

C. Regulation of Bank Holding Companies 10 

2. State Taxation of Financial Institutions and their 11 
Depositors 

FINDINGS AND RECOMMENDATIONS 17 

1. Intangibles Tax 17 

2. Regulation of Bank Holding Companies 18 

APPENDICES 

Authorizing Legislation A-1 

Chapter 905 of the 1983 Session Laws 
(Regular Session, 1984) 
Senate Joint Resolution 381 A-2 

Comnittee Membership B 

Chapter 1113 of the 1983 Session Laws C 

(Regular Session, 1984) 

Interstate Regional Reciprocal Banking and 
Bank Holding Company Act 

Chapter 1087 of the 1983 Session Laws D 

(Regular Session, 1984) 

Interstate merger and acquisition of Savings and 
Loans and on a Reciprocal Basis Permitted 

Regulatory Structure of Financial Institutions E 

Mr. C. C. Hope, Secretary of the Department of 
Commerce 

History of State Bank Supervision in North Carolina F 

Mr. James Currie, Commissioner of Banks 

History and Jurisdiction of Credit Union Commission G 

Mr. Roy D. High, Administrator of Credit Unions 



Savings and Loan Commission's Procedure H 

and Jurisdiction 

Mr. George S. King, the Administrator of the Savings 
and Loan Division 

North Carolina Bankers Association Statement I 

Mr. John R. Jordan 

North Carolina League of Savings Institutions 

Statement J 

Mr. Gordon P. Allen 

North Carolina Credit Union League Statement K 

Mr. Ruffin Bailey 
Memoranda on Mutual Fund Regulation and the Cash 
Management Account Device L 

Mr. Daniel Bell, Security Administrator 

Survey of States on Regulation of the CMA Device M 

Mr. Randall E. Schuckmann, North American Securities 
Administrator Association, Inc. 

Investment Company Institute Memoranda N 

Mr. Henry A. Mitchell 

Investment Company Institute Statement on Regulating 
Money Market Funds O 

Mr. Matthew P. Fink 

Financial Institutions Assurance Corporation 

Statement P 

Mr. Donald R. Beason 

State Taxation of Financial Institution Statement Q 

Mr Mark Lynch, Commissioner of Revenue 

Brief History of the Taxation of Banks and Savings R 

and Loan Associations — Mr. Lynch 

Differences in North Carolina Tax Treatment of Banks.... S 
and Savings and Loan Associations as of January 1, 1984 — 
Mr. Lynch 

Comparative Analysis of North Carolina Tax Collections.. T 
from Banks and Savings and Loans for the Years 
Indicated — Mr. Lynch 

Intangibles Tax Collected from Depositors on Money on... U 
Deposit — Mr. Lynch 

Statement on State Taxation of Types of Financial 
Institutions V 

Mr. B. E. Dail, Director of Tax Research Division of 
the Department of Revenue 



Comparison of State Taxes Imposed by Banks, Savings W 

and Loan Associations, and Credit Unions — Mr. Dail 

Comparison of Taxes Imposed by States and Local X 

Governments on Intangible Property--Mr . Dail 

States Not Taxing Intangible Personal Property Y 

—Mr. Dail 

Taxation of Tangible Personal Property of Banks, AA 

Savings and Loan Associations and Credit Unions — 
Mr. Dail 

Analysis of Total or Partial Repeal of the BB 

Intangibles Tax — Mr. Dail 



The Legislative Research Commission, authorized by Article 
6B of Chapter 120 of the General Statutes, is a general purpose 
study group. The Commission is co-chaired by the Speaker of 
the House and the President Pro Tempore of the Senate and has 
five additional members appointed from each house of the 
General Assembly. Among the Commission's duties is that of 
making or causing to be made, upon the direction of the General 
Assembly, "such studies of and investigation into governmental 
agencies and institutions and matters of public policy as will 
aid the General Assembly in performing its duties in the most 
efficient and effective manner" (G.S. 120-30.17(1)). 

At the direction of the 1983 General Assembly, the Legis- 
lative Research Commission has undertaken studies of numerous 
subjects. These studies were grouped into broad categories and 
each member of the Commission was given responsibility for one 
category ol study. The co-chairmen of the Legislative Research 
Commission, under the authority of General Statute 120-30.10 (b) 
and (c) , appointed committees consisting of members of the 
General Assembly and the public to conduct the studies. 
Co-chairmen, one from each house of the General Assembly, were 
designated for each committee. 

The study of the taxation and regulation of banks, savings 
and loan associations and credit unions was authorized by 
Section 1(28) of Chapter 905 of the 1983 Session Laws (1983 
Sessions) . That act states that the Commission may consider 
Senate Joint Resolution 381 in determining the nature, scope 

1 



and aspects of the study. Section 1 of Senate Joint Resolution 
381 reads: "The General Assembly hereby directs the Legisla- 
tive Research Commission to conduct a study of the present 
regulations and tax levies applicable to commercial banks, 
savings and loan associations and credit unions." Relevant 
portions of Chapter 905 and Senate Joint Resolution 381 are 
included in Appendix A. 

The Legislative Research Conunission grouped this study in 
its Finance area under the direction of Senator William W. 
Staton. The Committee was chaired by Representative Ed N. 
Warren and Senator James H. Edwards. The full membership of 
the Committee is listed in Appendix B of this report. 

The 19B4 Regular Session of the General Assembly in 
passing an earlier Comjtiittee proposal, the Interstate Regional 
Reciprocal Banking Act, specified that the Committee in 
addition study and report to the 1985 Session of the General 
Assembly on the extent of authority beyond that conferred on 
the Commissioner of Banks by that Act relating to acquisitions 
of North Carolina banks or bank holding companies by 
out-of-state regional bank holding companies (Section 3 of 
Chapter 1113) of the 1983 Session Laws (1984 Regular Session). 
Chapter 1113 is included as Appendix C. 



COMMITTEE PROCEEDINGS 



The first part of the Committee's study consisted of 
obtaining information on the taxation and regulation of the 
financial industry in general and in reviewing and passing upon 
the interstate regulation of certain segments of the financial 
industry. 

The Committee during the first half of 1984 devoted most 
of its time to this latter issue. The Committee by its Report 
to the 1984 Session of the 1983 General Assemhily recommended 
three pieces of legislation. Copies of that Report with the 
recommended legislation in its appendices are available from 
the Legislative Library. 

The first piece of legislation, dealing interstate region- 
al reciprocal banking, recommended to the 1984 Session 
v;as introduced as Senate Bill 706. During the legislative 
process that bill was amended to provide for registration of 
bank holding companies in North Carolina. Senate Bill 706 was 
ratified as Chapter 1113 of the 1983 Session Laws {Regular 
Session, 1984) and is attached as Appendix C. The second piece 
of recommended legislation permitting interstate regional 
mergers and acquisitions of savings and loan associations and 
their holding companies was introduced as Senate Bill 807 and 
v;as ratified Chapter 1037 of the 1983 Session Laws (Regular 
Session 1984) and is attached as Appendix D. The last piece of 
legislation recommended by the Committee deals with late fees 



on consumer loans and was introduced as Senate Bill 789 but was 
not ratified. Senator James H. Edwards was the primary sponsor 
ot all of the recommended legislation. 

During the later part of 1984 the Committee returned its 
attention to the general issue of the regulation and taxation 
of financial institutions within the State. Specifically the 
Committee investigated the need for State regulation of asset 
management accounts, and alleged inequitable tax treatment of 
the different types of the financial institutions operating in 
the State. 

1 . State Regulation of Financial Institutions Generally 

The Committee at the outset of its deliberations decided to 
obtain an overview of the state regulation of financial insti- 
tutions. The Committee asked the state regulatory authorities 
of these institutions to present the Committee relating to 
their present powers of regulation and anticipated need for 
future regulatory authority and their belief a.s to whether the 
supervision of the three types of financial institutions ought 
to bo consolidated in one state agency. 

Mr. C. C. Hope, the Secretary of the Department of Com- 
merce, presented a chart (Appendix E) showing for the three 
types of institutions both for state and federally-chartered 
institutions: the regulatory structure, regulatory powers, 
association powers, deposit insurance and taxation. Mr. Hope 
opined that the time may come when consolidation of state 



agencies regulating financial institutions should occur but 
that before that is done an extensive study be undertaken as to 
the effect of a consolidation on consumers as wfll as financial 
institutions. 

Mr. James Currie, the Commissioner of Banks, presented n 
brief history of state bank supervision in this State (attached 
as Appendix F) , He indicated that the state-chartered banks 
are in good financial condition. He argued for a state bank 
holding company statute (see the Report of the Committee to the 
1984 Regular Session of the General Assembly) . 

Mr. Roy D. High, Administrator of Credit Unions, outlined 
the history and jurisdiction of Credit Union Commission and the 
number, size and types of credit unions his division supervis- 
es. Mr. High's remarks are attached as Appendix G. 

Mr. George S. King, the Administrator of the Savings and 
Loan Division, sketched the Savings and Loan Commission operat- 
ing procedure and jurisdiction and indicated that savings and 
loan associations are still gearing their investments and 
business to real estate lending (Appendix H) . 

Representatives from the financial industries being 
regulated, also were asked to present their positions on 
whether there should be consolidation of state regulatory 
authority of these institutions; whether there are state 
statutes and regulatory provisions resulting in inequitable 
treatment of the different types of financial institutions and 
whether they sliould be changed and whether there are inequities 



in tho Rt-nt^r taxation of differont typos of finaiu-inl 
institutions and how these inequities should be remedied. 

Mr, John R. Jordan representing the North Carolina Bankers 
Association stated that the Association had not taken a 
position on the issue of consolidation but counselled caution 
citing the changes sweeping the finance industry (see Appfiidix 
I) . His comments with regard to equities in treatment are set 
forth below in the part of this report dealing with Taxation. 

Mr. Paul H. Stock read the presentation of Mr. Gordon P. 
Allen, the legislative agent for the North Carolina Leaguf of 
Savings Institutions (see Appendix J). Mr. Stock traced recent 
state and federal legislation affecting savings and loan 
associations. He stated his association's position that the 
present regulatory structure in adequate and efficient based on 
the differing functions of the three types of financial insti- 
tutions and its opposition to consolidation of the state's 
financial regulators. 

Mr. Ruffin Bailey representing the North Carolina Credit 
Union League stated that association's opposition to stan- 
dardization of regulation of the types of financial insti- 
tutions. He set forth the historical, the legal and structural 
uniqueness of credit unions as a financial institution. He 
emphasized that credit unions \/ere born of a real need of 
people of average means to obtain credit for consumer goods and 
that they are non-profit, member-owned cooperative financial 
institutions. Mr. Bailey's statement is contained in Appendix 
K. 



A. Potential State Regulation of 
"Cash Management Accounts" 

At the first meeting, the Honorable Harlan E. Doyles, the 
State Treasurer, suggested that the Committee should look into 
the need for State regulation of all entities receiving public 
deposits, specifically money market funds and cash management 
accounts . 

A cash management account is a device sponsored by 
brokerage houses by which cash deposits are accepted from 
clients and deposited in money market funds and orders of 
withdrawal from clients are honored. The largest of these 
devices is the Cash Management Account program (CMA) sponsored 
by Merrill, Lynch, Pierce, Fenner and Smith, Inc. 

Upon the invitation of the Committee, Mr. Daniel Bell III, 
Deputy Securities Administrator in the Department of Secretary 
of State appeared at the Committee's second meeting. Mr. Bell 
provided the Coirmittee with two memoranda attached as Appendix 
L giving a comprehensive overview of the history of security 
regulation by North Carolina and of the status of mutual funds 
under North Carolina and federal law; and an explanation of the 
CMA device. He explained the position of his office regarding 
further State regulation of these devices. In brief his 
position was that these devices are adequately regulated now, 



thai for North Carolina to regulate further these df:vices 
would, in effect, prohibit the sale of these devices in this 
State to the detriment of the public of this State and that the 
problems with these devices perceived by competing financial 
institutions are best addressed by Congress as a national 
policy rather than by the individual States. 

The Committee directed its staff to poll the states to 
determine whether there was any legislation, administrative 
rules or proceedings or court cases in their jurisdictions 
regarding the cash management account device. The poll was 
conducted under the auspices and with the aid of the North 
American Securities' Administrators Association, Inc. Of the 
24 States responding to the questionnaire, none was aware of 
any state activity in regard to enacted legislation, adminis- 
trative rules or proceedings or court cases regarding cash 
management accounts. Appendix M contains the analysis of the 
responses to the questionnaire. 

The Committee also received a memorandum (attached as 
Appendix N) from Mr. Henry A. Mitchell, Jr. representing the 
Investment Company Institute who argued that state regulation 
oi these devicf>s is of dubious constitutionality, would make 
these funds unavailable to North Carolina investors and is 
conceptually unsound. Mr. Matthew P. Fink, Senior Vice 
President and General Counsel of the Investment Company 
Institute appeared before the Committee at its October 1, 1984, 
meeting and indicated that legislation regulating money market 
funds had been considered in over twenty states and been 



enacted in none. He anjued th.Tt there was no need for any 
additional requlation of money market- funds. Mr. Fink's 
written remarks are attached as Appendix O. 

B. Mutual Deposit Guarantee Associations 

In view of the recent experience of financial institutions 
surety companies in a sister state, the Committee invited Mr. 
Donald R. Beason, the President and Chief Executive Officer of 
the Financial Institutions (FIAC) Assurance Corporation, to 
appear before the Committee. 

The FIAC is the sole North Carolina state-chartered 
corporation (G.S. 54B-236 et. seq .) which is authorized to 
guarantee deposits in banks, savings and loan association and 
credit unions. Mr. Beason was asked to speak to the specific 
internal safeguards and the specific external rules imposed on 
his corporation which protect deposits in North Carolina 
financial institutions insured by FIAC; reasons for the recent 
collapse of certain financial institutions in Nebraska; and a 
statistical analysis comparing the financial statu?, of FIAC and 
its federal equivalent, the Federal Savings and Loan Insurance 
Corporation. Mr. Beason distributed notebooks to Committee 
members containing his presentation and supporting materials a 
copy of which is available for inspection in the State Legisla- 
tive Library. 



Mr. Beason said that, since its beginning in 1967, FIAC 
has grown from insuring $50 million in deposits to nearly $2.8 
billion. FIAC insures 34 state-chartered savings and loan 
associations and 25 credit unions. Internally, FIAC guarantees 
the safety of deposits by imposing strict oversight and diag- 
nostic reviews over its member institutions. Mr. Beason 
indicated that his corporation is regulated by the State 
Department of Commerce and is examined by a combination of 
savings and loan association and credit union examiners from 
that Department. He assured the Committee that FIAC will not 
enter into operations in any state until it is assured, among 
other matters, of the adequacy of that state's regulatory 
process . 

Mr. Beason analysed the difficulties encountered with 
Commonwealth Savings Company and its insurer the Nebraska 
Guaranty Corporation which lead to their failures. He 
indicated that the Nebraska Guaranty Corporation was not "more 
than a fund of money with no professional risk management 
capabilities or powers." He stated that he believed that the 
situation which developed in Nebraska could not occur under the 
FIAC system. 

He also provided a detailed comparison of FIAC and FSLIC. 
Mr. Season's oral presentation is contained in Appendix P, and 
a notebook containing his supporting materials is available for 
inspection in the Legislative Library. 

C. Regulation of Bank Holding Companies 



10 



Mr. James Currie, the Commissioner of Banks, in discussing 
the effect of the passage of interstate reciprocal banking 
legislation in other states in the Southeast indicated that 
those states have broader authority to investigate bank holding 
companies coming into those states than he has for other 
states' bank holding companies coming into North Carolina. He 
stated that their lack of compatible authority does present 
slight problems in the uniformity of administration. 

Mr. Currie presented to the Committee an outline of the 
authority of other states in the Southeast Region over North 
Carolina bank holding companies in regional reciprocal 
interstate transactions, (see Appendix Q) . 

2. State Taxation of Financial Institutions 
and Their Depositors 

One of the main thrusts of the original legislation. 
Senate Joint Resolution 381, Section 1 (Appendix A) was to 
study the "tax levies applicable to commerical banks, savings 
and loan associations and credit unions." 

The Committee invited various state officials and 
representatives of private industry and local government to 
give their views on whether there are inequities in the state 
taxation of the various types of financial institutions and how 
these inequities should be remedied. 

Mr. Mark Lynch, the Secretary of Revenue, distributed to 
the Committee a copy of his written remarks (see Appendix R) 
the following four self-explanatory charts regarding state 
taxation of banks and savings and loan association: 



11 



Brief History of the Taxation of Banks and 
Savings and Loan Associations (see Appendix S) 

Differences in North Carolina Tax Treatment of 
Banks and Savings and Loan Associations as of 
January 1, 1984 (see Appendix T) 

Comparative Analysis of North Carolina Tax 
Collections from Banks and Savings and Loans for 
the Years Indicated (see Appendix U) ; and 

Intangibles Tax Collected From Depositors on 
Money on Deposit (see Appendix V) 

Mr. Lynch indicated that credit unions are not included on 
these charts because these financial institutions are not 
subject to income, franchise or intangible taxes. He also 
declined to opine as to whether or not inequities of taxation 
exist stating that he believed it to be inappropriate for a 
Secretary of Revenue to do so. 

Mr. John Jordan, legislative agent for the North Carolina 
Bankers Association, said that the state taxation of financial 
institutions have been reviewed and amended continuously since 
the 1969 Session of the General Assembly. He indicated that 
inequities in the taxation of the income of banks have been 
corrected and these corrections should not be disturbed. He 
further stated that tax inequities between the types of 



12 



financial institutions still exist and cited the intangibles 
tax which is imposed on customers of banks but not on those of 
savings and loans or of credit unions. His remarks are found 
as Appendix I. 

Mr. James M. Culberson, Jr., President of First National 
Bank of Randolph County, also spoke for the North Carolina 
Bankers' Association. He urged the repeal of the intangibles 
tax citing among his other beliefs that the tax is antiquated 
and is not imposed on many new types of investments and that 
the tax is not applied on a uniform basis in that credit unions 
and savings and loan associations are exempt. 

Gordon P. Allen and Paul H. Stock representing the North 
Carolina League of Savings Institutions, acknowledged the 
existence of differences in the tax treatment of various types 
of financial institutions but deferred to the General Assembly 
the question as to whether or not these differences were 
inequitable (The statements appear in Appendix J) . 

Mr. Ruffin Bailey, the legislative agent for the North 
Carolina Credit Union League stated that association's oppo- 
sition to changes in the present tax treatment of credit 
unions. He defended the differences in the state tax treatment 
of credit unions verses the other types of in-state financial 
institutions citing specific reasons for each difference. Mr. 
Bailey's statement is contained in Appendix K. 

The Honorable Harlan Boyles, the State Treasurer, in his 
remarks before the Committee recommended the repeal of the 
intangibles tax to place all financial institutions on an equal 



13 



footing. He suggested the General Fund would btiu'lji. from the 
repeal. General Fund revenues could then, be argued, be used 
to replace the revenues lost to cities and counties by the 
repeal. 

The Committee requested of the Revenue Department informa- 
tion regarding taxes imposed by each state on banks, savings 
and loan associations and credit unions and analysis of the 
effect of total or partial repeal of the intangibles tax. 

Mr. B. E. Dail, Director of the Tax Research Division of 
the Department of Revenue, presented to the Committee an 
explanation (Appendix W) and the following tables: 

Comparison of State Taxes Imposed by Banks, 
Savings and Loan Associations, and Credit 
Unions (Appendix X) ; 

Comparison of Taxes Imposed by States and Local 
Governments on Intangible Property (Appendix Y) ; 

States Not Taxing Intangible Personal Property 
(Appendix Z) ; and 

Taxation of Tangible Personal Property of Banks, 
Savings and Loan Associations and Credit Unions 
(Appendix AA) . 

He indicated that there is much variation in the way the states 
tax financial institutions. 

14 



On the issue of total or partial repeal of the intangibles 
tax, Mr. Dail said that $60,616,000 was collected by the 
intangibles tax during the 1982-1983 fiscal year, of which 
local governments received 93.3 percent. Of that amount $12.3 
million is the amount of intangibles tax paid on money on 
deposit by all taxpayers including corporations, less the tax 
credits allowed to corporations on their franchise taxes. Mr. 
Dail analysed the impact on state tax revenues, local govern- 
ment revenues, industrial development and in-migration of 
retired persons if the intangibles tax were repealed. He 
concluded that replacement revenues would be needed to offset 
the loss of intangible tax revenues, that under the remaining 
present tax structure these revenues would not likely develop 
in a short time period and that it is questionable whether 
repeal of the their tax would have the necessary dramatic 
effect on industrial development or on in-migration of retirees 
to develop large additional state revenues. Mr. Dail's analy- 
sis is contained in Appendix BB. 

Mr. C. Ronald Aycock, Executive Director of the North 
Carolina Association of County Commissioners' set forth the 
position of that Association in a letter, dated November 9, 
1984, to Senator Edwards in these words: 

"The Association does not support the repeal of the 
intangibles tax. If the tax is repealed, county government 
should be held harmless from any revenue loss." 



15 



The Coimtiittee also was briefed by the staff of the I-egis- 
lative Research Commission's Committee on Revenue Laws which is 
also investigating changes to the intangibles tax. 

During the period of the Committee's life the General 
Assembly in its 1984 Regular Session considered a bill, Senate 
Bill 750 — introduced by Senator W. Craig Lawing of Mecklenburg 
County, which would have phased out the intangibles tax over a 
five-year period and would have provided local governments with 
partial compensation for the resulting revenue loss. Senate 
Bill 750 failed to pass when the Senate refused to appoint a 
conference committee. 



16 



FINDINGS AND RECOMMENDATIONS 

The Committee on the Taxation and Regulation of Banks, Savings 
and Loans and Credit Unions makes the following findings and 
recommends the following actions to the 1985 General Assembly: 

1. Intangibles Tax 
A. Findings 

(1) The public policy of the State is to reduce its citizen's 
tax burden, insofar as possible, but not so as to endanger 
providing needed public services. 

(2) The costs and difficulties of collecting the intangible 
tax on money on deposit and money on hand are an onerous and 
costly imposition by the State on banks and other corporations. 

(3) Money on deposit in banks is subject to the intangibles 
tax whereas money on deposit in credit unions and savings and 
loan associations is not. Banks are therefor at a comparative 
disadvantage with the State's other financial institutions in 
attracting and retaining depositors. 

(4) The intangibles tax on funds on deposit with insurance 
companies (G.S. 105-205) produces little tax and like the tax 
on money on deposit is returned to the local governments on the 
basis of population. 

(5) North Carolina's intangibles tax places this State at a 
comparative disadvantage with other states not imposing this 



tax in attracting new industry and those individuals dependent 
on earnings from invested income. 

if)) The repeal of the taxes on these types of intangible 
personal property would lead to increased economic growth, 
immigration of retirees to North Carolina, and for certain 
individuals who maintain residences in North Carolina and other 
states, the establishment of their official residence in North 
Carolina. 

B. Recommendations 

(1) That legislation be enacted to repeal the intangibles tax 
on money on deposit (G.S. 105-199 and G.S. 105-205), and money 
on hand (G.S. 105-200), effective for tax years beginning on or 
after January 1, 1985. 

(2) That the 1985 General Assembly coordinate the replacement 
of revenue loss to local governments resulting from the recom- 
mended repeal of tax on these types of intangible personal 
property. 



2. Regulation of Bank Holding Companies 
A. Findings 

(1) The financial services industry is undergoing rapid and 
sweeping change both in North Carolina and nationally. 



18 



(2) A need exists for the State of North Carolina to be aware 
of and involved in the continuing development of the financial 
services industry operating within her borders and affecting 
the economic well-being of her citizens. 

(3) Under the legislation enacted by the 1984 General Assembly 
relating to interstate regional reciprocal banking and regis- 
tration of bank holding companies. North Carolina state regula- 
tors do not have the authority for a continuing supervision of 
regional out-of-state bank holding companies acquiring North 
Carolina banks or bank holding companies while other Southeast- 
ern states have been given that authority to their regulators 
with respect to North Carolina bank holding companies acquiring 
their in-state banks or bank holding companies. 

(4) The state bank regulators of North Carolina need the 
continuing supervisory and examination authority over bank 
holding companies afforded other Southeastern states' bank 
regulators to assure the continuing viability of North Carolina 
banking and to cooperate with other states bank regulators in 
an efficient and effective administration of the interstate 
regional reciprocal banking legislation. 

B. Recommendation 

That the House and Senate Banking Committees of the 1985 
General Assembly study the enactment of legislation to vest in 
the Commissioner of Banks power to regulate bank holding 
companies, to approve acquisitions of North Carolina banks by 



19 



all bank holding companies operating in this State; and to 
examine and require reports of those bank holding companies, 



20 



APPENDIX A 
" B 1142 CHAPTER 906 

AN Arr AIITHOHIZINU STUDIES BY THK LKUISLATIVF HKSKA|«H 
SpTialZ^T ^L™'' COMMISSION ON (iVuRKN^WT 

The Genenil Assembly oC North Carulin:, enacLs: 

Section 1. Tlie LxKislative lU'starch ('omniksion may study ll.c lonirs 
Lsted below. Listed w,lh each top.c >s the 198J bill or resolution that on „,,. lly 
proposed the study and the name ol the sponsor The Comtnis,sion tn ,y , on. idei 
the or'K-ud b.ll or resolution n, deternun.ng the nature, scope and aspects ol 
the study. The topics are: ' 



(28) Regulation amJ Ta^afon of Banks. Savmgs and lx.ans and Cred.t 
Unions (S.J.R. 381 Edwards of Caldwell) 



Sec. 6. For each of the topics the Legislative Researih Commission 
decides to study, the Commis.sion may report its linding.s, together with any 
recommended legislation, to the 19H4 Session of the General As.sembly or to th- 
1985 General As.sembly, or the Commission may make an interim report to the 
1984 Session and a final report to the 1985 General Assembly. 



Sec. 13. Bills and Resolution References. The listing of the original bill 
or resolution in this act is for referen.x^ purposes ..nly and shall not be deemed 
to have incorporated by reference any of the substantive provisions contained 
in the original bill or resolution 

Se< . 14. This act is effective upon ratification. 
July 'l9«!i' '^'""''"' '^^'"'''■'' '*''"' '*"■'''' """^ ""<* ratified, this the 21st day of 



A-1 



APPENDIX A 

GENERAL ASSEMBLV OF NORTH CAROLINA 
SESSION 1983 

SENATE JOINT RESOLUTION 3R 1 



Sponsors: Senator Edwards of Caldwell. 

M§f§rred_toi B.ulss_and_OBeration_of_the_ Senate^ 

April in, 1^83 

1 A JOINT RESOLUTION DIRECTING THE LEGISLATIVE RESEARCH C0M1ISST0K 

2 TO STUDY PRESENT SYSTEM OF REGULATION AND TAXATION OF BANKS, 

3 SAVINGS AND LOANS AND CREDIT UNIONS. 

'1 Whereas, the members of the North Carolina General 

5 Assembly are keenly aware of changes currently taking place with 

6 regard to the operational and organizational strategies of the 
1 various financial institutions in North Carolina; and 

8 Whereas, the laws enacted which deal with regulation and 

9 taxation are not uniformly applicable to commercial banks, 
^^ savings and loan associations and credit unions, as dramatically 
^^ illustrated as follows: 

STATE AND LOCAL TAXES LEVIED ON BANKS, 



12 

^3 SAVINGS AND LOAN ASSOCIATIONS, 

^'' AND CREDIT UNIONS 

i§llK§ Savings Credit 

& Loans Unions 



17 



I- Franchise Tax 



General business franchise 

I 9 

G.S. 105-122 Taxable Taxable Exempt 

20 



($1.50 per 'K1,000 tax base) 
A-2 



GENERAL ASSEMBLY OF NORTH CAROLINA SESSION 1983 

1 II. Cor£grate Income Tax 

2 G-S. 105-130 Tdxah]" Tax?»ble Exempt 

3 6% of State taxable income 
h III. Intan£ibles Tax (Paid bj 

5 the institutions) 

6 Honey on Deposit 

7 G.S. 105-199 Exempt Taxable Exempt 

8 (100 per $100.00) 
Money on Hand 

G.S. 105-200 Taxable Taxable Exempt 

(25jzf per $100.00) 
Accounts Receivable 

G.S. 105-201 Taxable Exempt Exempt 

(250 per $100.00) 
Notes Receivable, etc. 

G.S. 105-202 Taxable Exempt Exempt 

(250 per $100.00) 
Shares of Stock 
G.S. 105-203 Taxable Exempt Exempt 

IV. Intanciibles Tax (Paid 
by depositors) 
Money on Deposit 

(100 per $100.00) Taxable Exempt Exempt 

V- I;i2§n§§ Tax 

ftnnual privilege tax 

G.S. 105-102.3 Taxable Exempt Exempt 

($30. 00 per $^, 000, 000 
of average total assets) 



Senate Joint Resolution 38 1 
A-3 



GENERAL ASSEMBLY OF NORTH CAROLINA SESSION 198 3 

1 VI. Sales and Use Tax Taxable Taxable Taxable 

2 VII- Ad Valorem Tax 'i.,x .'ile Taxable Taxable 

3 Whereas, the General Assembly has crt-att-fl md providr-'" 
li for separate and autonomous regulatory bodies in the Bankinn 

5 Commission, the Savings and Loan Commission and the Credit rrnion 

6 Commission, all with separate and express jurisdictional 

7 responsibilities none of which have an overall authority to 

8 develop a State policy for regulation and taxation; 

9 Whereas, the public interest dictates the need for a 

10 legislative review of the entire industry, with emphasis upon 

11 regulation and taxation; Now, therefore, 

12 Be it resolved by the Senate, the House of 'Representatives 

13 concurring: 

lli Section 1. The General Assembly hereby directs the 

15 Legislative Research Commission to conduct a study of the present 

16 regulations and tax levies applicable to commercial banks, 

17 savings and loan associations and credit unions. 

18 Sec. 2. The Legislative Research (Commission shall 

19 report its findings, together with any recommended legislation, 

20 to the 1984 Session of the General Assembly or the Commission may 

21 make an interim report to the '[^BH Session and a final report to 

22 the 1985 General Assembly. 

23 Sec- 3. This resolution is effective upon ratification. 
2h 

25 
2 b 
27 
28 



Senate Joint Re.'-.olution 181 

A- 



APPENDIX B 

MEMBI'IRSIIIP 
BANKS, SAVINGS & LOANS STUDY COMMITTEE 



Senator James H, Edwards 

Cochairman 

420 7th Avenue, S.W. 

Hickory, NC 28601 

Tel. 704-328-6405 



Rep. Edward N. Warren 

Cochairman 

401 W. First Street 

Greenville, NC 27834 

Tel. 919-758-1543 



Senator Dallas L. Alford, Jr. 

Box 229 

Rocky Mount, NC 2 7801 

Tel. 919-442-4696 



Rep. Harold J.Brubaker 
138 Scarboro Street 
Asheboro, NC 27203 
Tel. 919-629-5128 



Senator Harold W. Hardison 
P. O. Box 128 
Deep Run, NC 28525 
Tel. 919-568-3131 



Rep. Charles D. Evans 
P. O. Box 189 
Manteo, NC 27954 
Tel. 919-473-2171 



Senator Joseph E. Johnson 

Box 750 

Raleigh, NC 27602 

Tel. 919-833-9789 



Rep. John C. Hasty 
1181 W. Sanders Street 
Maxton, NC 28364 
Tel. 919-844-5257 



Senator Kenneth C. Royall, Jr 
P. 0. Box 8766 
Forest Hills Station 
Durham, NC 27707 
Tel. 919-489-9191 



Rep. Wendell H. Murphy 
P. 0. Box 759 
Rose Hill, NC 28458 
Tel. 919-289-2111 



Senator William Staton 
205 Courtland Drive 
Sanford, NC 27330 
Tel. 919-775-5616 



B-1 



APPENDIX C 

GENERAL ASSEMBLY OF NORTH CAROLINA 

1983 SESSION (REGULAR SESSION, 1984) 

RATIFIED BILL 



CH&PTEB 1113 
SENATE BILL 706 
AN ACT TO PEEHIT INTERSTATE BANKING IN NORTH CAROLINA ON A 
RECIPROCAL BASIS AND TO PROVIDE FOR THE REGISTRATION OF BANK 
HOLDING COHPANIES. 

Hhereas, banking organizations play a vital role in the 
development and growth of a viable local and regional econoay; 
and 

Whereas, it is anticipated that bankinq services in 
North Carolina will be iaproved and coapetition enhanced by the 
developaent in the southeastern region of the United States of 
bank holding conpanies that are sufficient in size to compete 
effectively with the largest banking organizations in the Onited 
States in all areas of banking: and 

ihereas, it is also anticipated that econoaic growth in 
North Carolina will be stimulated and aided by the development of 
such bank holding coapanies in the southeastern region of the 
Onited States; and 

Whereas, it is desirable, at the same tiae, to place 
certain liaitations on the development of bank holding coapanies 
serving North Carolina in order to prevent undue concentrations 
of economic resources and a lessening of competition as a result 
thereof; and 

Whereas, a number of the United States, including states 
located in the southeastern region of the Onited States and 
contiguous to North Carolina, have already authorized soae fora 
of interstate banking; and 

Whereas, it is desirable to encourage other states 
located in the southeastern region of the Onited States to pernit 
the acquisition of their banks and bank holding coapanies by bank 
holding companies principally located in North Carolina in order 
to further the developaent of bank holding companies in the 
southeastern region of the Onited States; and 

Whereas, federal law permits each of the Onited States 
to determine the extent to which bank holding companies may 
engage in interstate banking within its borders; and 

Hhereas, it is in the best interest of North Carolina 
and its citizens to establish legislation to permit acquisition, 
on a reciprocal basis, of North Carolina banks and bank holding 
companies by bank holding companies principally located in other 
states in the southeastern region of the Onited States, subject 
to the supervision and regulation of the North Carolina 
Commissioner of Banks; Now, therefore. 
The General Assembly of North Carolina enacts: 

Section 1. . Chapter 53 o f the General Statutes of North 
Carolina is amended to add two new Articles as follows: 

"ARTICLE 17. 

"North Carolina Regional Reciprocal Banking Act. . 
"* 53-209. Title . — This Article shall be known and may be 
cited as the North Carolina Regional Reciprocal Banking Act. 

C-1 



"§ 53-210. Definitions. — Notwithstanding any other section of 
this Chapter, for the purposes of this Article: 

(1) 'Acquire' neans: 

a. the nerger or consolidation of one bank holding 
company with another bank holding company; 

b. the acquisition by a bank holding company of direct 
or indirect ownership or control of voting shares 
of another bank holding coapany or a bank, if, 
after such acquisition, the bank holding company 
making the acquisition will directly or indirectly 
own or control more than five percent (5%) of any 
class of voting shares of the other bank holding 
company or the bank; 

c. the direct or indirect acquisition by a bank holding 

company of all or substantially all of the assets 
of another bank holding company or of a bank; or 

d. any other action that would result in direct or 
indirect control by a bank holding company of 
another bank holding company or a bank. 

(2) 'Bank' means any 'insured bank' as such term is defined in 
Section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 
18 13(h)) or any institution eligible to become an 'insured bank' 
as such term is defined therein, which, in either event, 

a. accepts deposits that the depositor has a legal 
right to withdraw on demand; and 

b. engages in the business of making commercial loans. 

(3) 'Banking office' means the principal office of a bank, any 

branch of a bank, any teller's window of a bank or any 
other office at which a bank accepts deposits: 
Provided, however, that 'banking office' shall not mean: 

a. unmanned automatic teller machines, point of sale 
terminals or other similar unmanned electronic 
banking facilities at which deposits may be 
accepted ; 

b. offices located outside the United States; or 

c. loan production offices, representative offices or 
other offices at which deposits are not accepted. 

(4) 'Bank holding company' has the meaning set forth in 

Section 2(a)(1) of the Bank Holding Company Act of 1956 
as amended (12 0. S. C. 1841(a) (1)). 

(5) 'Commissioner' means the Commissioner of Banks of this 

State. 

(6) 'Control' has the meaning set forth in Section 2(a)(2) of 

the Bank Holding Company Act of 1956 as amended (12 
U.S.C. 1841 (a) (2) ). 

(7) 'Deposits' means all demand, time, and savings deposits, 

without regard to the location of the depositor: 
Provided, however, that 'deposits' shall not include any 
deposits by banks. For purposes of this Article, 
determination of deposits shall be made with reference 
to regulatory reports of condition or similar reports 
made by or to state and federal regulatory authorities. 

(8) 'North Carolina bank' means a bank that: 

a. is organized under the laws of this State or of the 
United States; and 



SenatP Bill 706 



C-2 



b. has banking offices located only in this State. 

(9) 'North Carolina bank holding company* means a bank holding 

company : 

a. that has its principal place of business in this 
State; 

^' the North Carolina bank and regional bank 

subsidiaries of which hold more than eighty percent 
(80%) of the total deposits held by all of its bank 
subsidiaries, other than bank subsidiaries 

controlled by it in accordance with G.S. 53-2 12 of 
this Article; and 

c. that is not controlled by a bank holding company 
other than a North Carolina bank holding company. 

(10) 'Principal place of business* of a bank holding company 
means the state in which the total deposits held by the 
banking offices of the bank holding company's bank 
subsidiaries are the largest. 

(11) 'fiegion' means the states of Alabama, Arkansas, Florida, 
Georgia, Kentucky, Louisiana, Maryland, Mississippi, 
North Carolina, South Carolina, Tennessee, Virginia and 
iest Virginia, and the District of Columbia. 

(12) 'Regional bank' means a bank that: 

a. is organized under the laws of the United States or 
of one of the states in the region other than North 
Carolina; and 

b. has banking offices located only in states within 
the region. 

(13) 'Regional bank holding company' means a bank holding 
company : 

a. that has its principal place of business in a state 
within the region other than North Carolina; 

b. the regional bank and North Carolina bank 
subsidiaries of which hold more than eighty percent 

(8 0%) of the total deposits held by all of its bank 
subsidiaries, other than bank subsidiaries 

controlled by it in accordance with G.S. 53-2 12 of 
this Article; 

c. that is not controlled by a bank holding company 
other than a regional bank holding company; and 

d. that neither is controlled by nor is a foreign bank 
as defined in the International Banking Act of 1978 
(12 O.S. C. 3101 (7) ). 

(1U) 'State' means any state of the Onited States or the 

District of Columbia. 

(15) 'Subsidiary' has the meaning set forth in Section 2(d) of 

the Bank Holding Company Act of 1956 as anended (12 

D.S.C. 1841 (d)). 

"§ 53-2 11. Acguis itions by regiona l bank holding c ompanies . -- 

(a) A regional bank holding company that does not have a North 

Carolina bank subsidiary (other than a North Carolina bank 

subsidiary that was acquired either pursuant to Section 116 or 

Section 123 of the Garn-St Germain Depository Institutions Act of 

1982 (12 O.S.C. 1730a(m), 1823(f)) or in the regular course of 

securing or collecting a debt previously contracted in good 

faith, as provided in Section 3(a) of the Bank Holding Company 

Senate Bill 706 3 

C-3 



Act of 1956 as amended (12 U.S.C. 1842 (a))) may acquire a North 
Carolina bank holding conpany or a North Carolina bank with the 
approval of the Commissioner. The regional bank hoidinq company 
shall subnit to the Commissioner an application for approval of 
such acquisition, which application shall be approved only if: 

(1) The Commissioner determines that the laws of the 
state in which the regional bank holding company 
making the acquisition has its principal place of 
business permit all North Carolina bank hoidinq 
companies to acquire banks and bank hoidinq 
companies in that state; 

(2) The Commissioner determines that the laws of the 
state in which the regional bank holding company 
making the acquisition has its principal place of 
business permit such regional bank holding company 
to be acquired by the North Carolina bank holding 
company or North Carolina bank sought to be 
acquired. For the purposes of this subsection, a 
North Carolina bank shall be treated as if it were 
a North Carolina bank holding company; 

(3) The Commissioner determines either that the North 
Carolina bank sought to be acquired has been in 
existence and continuously operatinq for more than 
five years or that all of the bank subsidiaries of 
the North Carolina bank hoidinq company sought to 
be acquired have been in existence and continuously 
operatinq for more than five years: Provided, that 
the Commissioner may approve the acquisition by a 
regional bank hoidinq company of all or 
substantially all of the shares of a bank orqanized 
solely for the purpose of facilitating the 
acquisition of a bank that has been in existence 
and continuously operating as a bank for more than 
five years; and 

(4) The Commissioner makes the acquisition subject to 
any conditions, restrictions, requirements or other 
limitations that would apply to the acquisition by 
a North Carolina bank holding company of a bank or 
bank holding company in the state where the 
regional bank holding company making the 
acquisition has its principal place of business but 
that would not apply to the acquisition of a bank 
or bank hoidinq company in such state by a bank 
holding company all the bank subsidiaries of which 
are located in that state. 

(b) A regional bank holding company that has a North Carolina 
bank subsidiary (other than a North Carolina bank subsidiary that 
was acguired either pursuant to Section 116 or Section 123 of the 
Garn-St Germain Depository Institutions Act of 1982 (12 U.S.C. 
1730a(m), 1823(f)) or in the regular course of securing or 
collecting a debt previously contracted in good faith, as 
provided in Section 3(a) of the Bank Holding Company Act of 1956 
as amended (12 O.S.C. 1842 (a))) may acquire any North Carolina 
bank or North Carolina bank holding company with the approval of 
the Commissioner. The regional bank holding company shall submit 

^ Senate Bill 706 



to the C OBinissioner an application for approval of such 
acquisition, which application shall be approved only if: 

(1) The Comaissioner determines either that the North 
Carolina bank sought to be acquired has been in 
existence and continuously operating for more than 
five years or that all of the bank subsidiaries of 
the North Carolina bank holding company sought to 
be acquired have been in existence and continuously 
operating for more than five years: Provided, that 
the Commissioner may approve the acquisition by a 
regional bank holding company of all or 
substantially all of the shares of a bank organized 
solely for the purpose of facilitating the 
acquisition of a bank that has been in existence 
and continuously operating as a bank for more than 
five years; and 

(2) The Commissioner makes the acquisition subiect to 
any conditions, restrictions, requirements or other 
limitations that would apply to the acquisition by 
a North Carolina bank holding company of a bank or 
bank holding company in the state where the 
regional bank holding company making the 
acquisition has its principal place of business but 
that would not apply to the acquisition of a bank 
or bank holding company in such state by a bank 
holding company all the bank subsidiaries of which 
are located in that state. 

(c ) The Commissioner shall rule on any application submitted 
under this section not later than 90 days following the date of 
submission of a complete application. If the Commissioner fails 
to rule on the application within the requisite 90-day period, 
the failure to rule shall be deemed a final decision of the 
Commissioner approving the application. 

"* 53-212. Exceptions . --A North Carolina bank holding company, 
a North Carolina bank, a regional bank holding company, or a 
regional bank may acquire or control, and shall not cease to be a 
North Carolina bank holding company, a North Carolina bank, a 
regional bank holding company, or a regional bank, as the case 
may be, by virtue of its acquisition or control of: 

(1) a bank having banking offices in a state not within the 
region, if such bank has been acguired pursuant to the provisions 
of Section 116 or Section 123 of the Garn-St Germain Depository 
Institutions Act of 1982 (12 O.S.C. 1730a(m), 1823(f)): 

(2) a bank having banking offices in a state not within the 
region, if such bank has been acquired in the regular course of 
securing or collecting a debt previously contracted in good 
faith, as provided in Section 3(a) of the Bank Holding Company 
Act of 1956 as amended (12 U. S. C. 1842(a) ) , and if the bank or 
bank holding company divests the securities or assets acquired 
within two years of the date of acquisition. A North Carolina 
bank, a North Carolina bank holdinq company, a reqional bank 
holding company, or a regional bank may retain these interests 
for up to three additional periods of one year each if the 
Commissioner determines that the required divestiture would 



Senate Bill 706 

C-5 



create undue financial difficulties for that bank or bank holding 
company; or 

(3) a bank or corporation organized under the laws of the 
United States or of any state and operating under Section 25 or 
Section 25(a) of the Federal Reserve Act as amended (12 U.S.C. 
60 1 or 6 11-3 1) or a bank or bank holding company organized under 
the la«s of a foreign country that is principally engaged in 
business outside the United States and that either has no banking 
office in the United States or has banking offices in the United 
States that are engaged only in business activities permissible 
for a corporation operating under Section 25 or Section 25(a) of 
the Federal Reserve kct as amended. 

"§ 53-213. Prohibitions.-- (a) Except as expressly permitted by 
federal law, no bank holding company that is not either a North 
Carolina bank holding company or a regional bank holding company 
shall acquire a North Carolina bank holding company or a North 
Carolina bank. 

(b) Except as required by federal law, a North Carolina bank 
holding company or a regional bank holding company that ceases to 
be a North Carolina bank holding company or a regional bank 
holding company shall as soon as practicable and, in all events, 
within one year after such event divest itself of control of all 
North Carolina bank holding companies and all North Carolina 
banks: Provided, however, that such divestiture shall not be 
required if the North Carolina bank holding company or the 
regional bank holding company ceases to be a North Carolina bank 
holding company or a regional bank holding company, as the case 
nay be, because of an increase in the deposits held by bank 
subsidiaries not located within the region and if such increase 
is not the result of the acquisition of a bank or bank holding 
company. 

"§ 53-2 14. Appl icable laws, rules and regulation s, — (a) Anv 
North Carolina bank that is controlled by a bank holding company 
that is not a North Carolina bank holding company shall be 
subject to all laws of this State and all rules and regulations 
under such laws that are applicable to North Carolina banks that 
are controlled by North Carolina bank holding companies. 

(b) Notwithstanding the provisions of G. S. 53-95, the 

Commissioner may promulgate rules, including the imposition of a 
reasonable application and administration fee, to implement and 
effectuate the provisions of this Article. 

"§ 5 3-215. Appeal of commissioner's d ecision . — Notwithstanding 
any other provision of law, emy aggrieved party in a proceeding 
under G.S. 53-211 or G.S. 53-212(2) may, within 30 days after 
final decision of the Commissioner and by written notice to the 
Commissioner, appeal directly to the North Carolina Court of 
Appeals for judicial review on the record. In the event of an 
appeal, the Commissioner shall certify the record to the Clerk of 
the Court of Appeals within 30 days after filing of the appeal. 

"§ 5 3-216. P eriodic rep orts ; i nterstate agreements. — The 
Commissioner may from time to time require reports under oath in 
such scope and detail as he may reasonably determine of each 
regional bank holding company subject to this Article for the 
purpose of assuring continuing compliance with the provisions of 
this Article. 



Senatf Bill 706 
C-6 



The Cofflmissionei.- may enter into cooperatjvf iqr»'«-'iiiori t : . with 
other back, regulatory authoritiet; for the period ir t-x^i mina t . on of 
any regional bank holding company that has a North Catolin.i bank 
subsidiary and may accept reports of examination and oth*>r 
records from such authorities in lieu of conducting its own 
examinations. The Comnissioner may enter into -joint action: with 
other bank regulatory authorities having concurrent iurisdiction 
over any regional bank, holding company that has a North Carolina 
bank subsidiary or may take such actions independently to carry 
out its responsibilities under this Article and assure compliance 
with the provisions of this Article and the applicable banking 
laws of this State. 

"§ 53- .^17. Enforcement . — The Co mraissioner shall have tae power 
to enforce the provisions of this Article, including the 
divestiture requirement of G.S. 53-2 1i(b), through an action in 
any court of this State or any other state or in anv court of the 
United States, as provided in G.S. 53-94 and G.S. 53-134, f.,r the 
purpose of obtaining an appropriate remedy for violition of any 
provision of this Article, including such criminal penalties as 
are contemplated by G.S. 53-134. 

"§ 53-218. Nonsever ability. --It i :^ the piiri)o;,e of thir. -Vitscic 
17 to facilitate orderly development of ti.inkin() or ganiza ti r>nr, 
that have banking offices in more than one ;;tato within the 
region. It is not the purpose of this Article to authorize 
acquisitions of North Carolina bank holding corapames or North 
Carolina banks by bank holding companies that do /lot h^iv. their 
principal place of business in thi.'^ State on any basi:. oth'i llian 
as expressly provided in this Article. Therefore, it any portion 
of this Article pertaining to the terms and conditions for and 
limitations upon acquisition of North Carolina bank holding 
companies and North Carolina banks by bank holding companies that 
do not have their principal place of business in this State is 
determined to be invalid for any reason Dy a final nonappealable 
order of any North Carolina or federal court ol (otupetent 
jurisdiction, then this entiie Article shall be null and void in 
its entirety and shall be of no further force or effect from the 
effective date of such order: Provided, however, tMat any 
transaction that has been lawfully consummated pursuant ♦ ■ t h i <, 
Article prior to a determination of invaLidity tie 

unaffected by .such determination. 

"ARTICLE 18. 
"Bank Holding Company Act of 1984. 

"« 53-225. Title and scope.— (a) This Article shall b< knoyn 

and may be cited as the North Carolina Bank Holding Comp.i! . t 

of 1984. 

(b ) This Article provides for the registration of bank hoiamu 
companies in North Carolina. Nothing contained in this Article 
shall be deemed to apply to the registration, examination or 
supervision of banks or trust companies. 

(c) Action.^ by the Commissioner under this Article 5.hr.li not 
be subject to review by the State Banking Commission but .sliali be 
reviewable pursuant to G.S. 53-231. 

"% 53-226. Def initi ons. — For the purposes of this Article: 
(a) 'Bank' means any insured bank as the term is defined in 

Section 3(h) of the Federal Deposit Insurance Act, (12 O.S.C. 



Senate Bill 706 

C-7 



Section 1813(h)), or any institutKKi «'liqibLo t<i become an 
insured bank as the term is defined therein, which, in either 
event: 

(1) Accepts deposits that the depositor has a leqal 
right to withdraw on demand; and 

(2) Engages in the business of making comnerciai loans. 

(b) 'Bank holding company' means any company which has control 
over any bank. 

(c) 'Commissioner' means the Commissioner of Banks of this 
State. 

(d) 'Company' means a corporation, ioint stock company, 
business trust, partnership, voting trust, association, and any 
Similar organized group of persons, whether incorporated or not, 
and whether or not organized under the laws of this State or any 
other state or any territory or possession of the United States 
or under the laws of the foreign country, territory, colony or 
possession thereof, other than a corporation all the capital of 
which is owned by the Onited States or a corporation which is 
chartered by the Congress of the United States; 'company' 
includes subsidiary and parent companies. 

(e) 'Control' means that: 

(1) Any company directly or indirectly or acting 
through one or more persons owns, controls, or has 
power to vote twenty-five per centum {25%) or more 
of the voting securities of the bank; 

(2) The company controls in any manner the election of 
a majority of the directors, managers or trustees 
of the bank or company; or 

(3) The Commissioner determines, after notice and 
opportunity for hearing, that the company directly 
or indirectly exercises a controlling influence 
over the management or policies of the bank or 
company. 

(f ) 'Subsidiary', with respect to a bank holding company, 
means: 

(1) Any company twenty-fiv<> p»'i ci mi turn (/''j^) oi mow of 
whose voting shares (oxclU'lLnj shares owned by the 
United States or by any company wholly owned by the 
United States) is held by it with power to vote; 

(2) Any company the election of a majority of whose 
directors is controlled in any manner by a bank 
holding company; or 

(3) Any company with respect to the management or 
policies of which a bank holding company has the 
power, directly or indirectly, to exercise control, 
as determined by the Comrai r.sioner. 

(g ) For the purposes of any proceeding under subdivision;. 
(e)(3) and (f) (3) of this section, there is a presumption that 
any company which directly or indirectly owns, controls, or has 
power to vote less than 5 percent {5%) of any class of voting 
securities of a given bank or company does not have control over 
that bank or company. 

"§ 53-227. Registration of bank holding companies. --Every bank 
holding company, not later than July 1, 19aS, or within 1B0 days 
after becoming a bank holding company controlli£<g a North 



Senate Bill 706 



Carolina federally or State- char tered back or banks, or within 
180 days after acquiring control over a nonbank subsidiaLy or 
subsidiaries having offices located in this State shall register 
with the Commissioner on forms approved by the Comaissioner. 

"§ 53-228. Cease and desist .--Upon a finding that any action 
of a bank holding company or nonbank subsidiary subject to this 
Article may be in violation of any North Carolina bank Lnq law, 
tho Commissioner, after a reasonable notice to thf> bank holding 
company or its nonbank subsidiary and an opportunity for it to be 
heard, shall have the authority to order it to cease and desist 
from such action. If the bank holding company or nonbank 
subsidiary fails to appeal such decision in accordance with G. S. 
53-231 hereof and continues to engage in such action in violation 
of the Commissioner's order to cease and desist such action, it 
shall be subject to a penalty of one thousand dollars ($1,000), 
to be recovered with costs by the Commissioner in any court of 
competent jurisdiction in a civil action prosecuted by the 
Commissioner. The penalty provision of this section shall be in 
addition to and not in lieu of any other provision ot law 
applicable to a bank holding company's or its nonbank 
subsidiary's failure to comply with an order of the Commissioner. 

"* 53-2 29. Requisi tion and c ontrol of certain nonbank bank ing 
institutions . — Notwithstanding any other provision of this 
Article or any other provision of the General Statutes of this 
State, no bank holding company or any other company may acguire 
or control any banking institution that: 

(1) has offices located in this State; and 

(2) is not a bank as defined in G. S. 53-226 (a) of this 
Article. 

For purposes of this section, 'company' means any corporation, 
partnership, business trust, association, or similar 

organization, or any other trust unless by its terms it must 
terminate within 25 years or not later than 2 1 years and 10 
months after the death of individuals living on the effective 
date of the trust, and 'banking institution' means any 
institution organized under Article 2 of Chapter 53 (G. S. 53-2, 
et se£.) or Article 11 of Chapter 53 (G. S. 53-136, et seg. ) of 
the General Statutes of this State or under Chapter 2 of Title 12 
of the United States Code (12 0. S. C. § 21, et seg. ) . Provided, 
the provisions of G.S. 53-229 shall not apply to applications by 
any company which is chartered by the Congress of the United 
States and which application is pending before the Commissioner 
on the effective date of this section. 

"§ 53-230. Rules. --Notwithstanding the provision of G.S. 53- 

95, the Commis.'ji oner may promulgate such reasonable rules as may 
be necessary to effectuate the purposes of this Article. 

"§ 53-23 1. Ae^eal of c ommissioner 's d ecisio n. — Notwithstanding 
any other provision of law, any aggrieved party may, within 30 
days after final decision of the Commissioner and by written 
notice to the Commissioner, appeal directly to the North ("aroiina 
Court of Appeals for judicial review on the record. In th< tvont 
of an appeal, the Commissioner shall certify tho record to thr 
Clerk of the Court of Appeals within 30 days thereafter. Such 
record shall include all memoranda, briefs and any other 
documents, data, information or evidence submitted by any party 

Senate Bill 706 9 

C-9 



to such proceeding except for material such as trade secrets 
normally not available through conmercial publication for which 
such party has made a claim of confidentiality and requested 
exclusion from the record which the Conmissioner deems 
confidential. All factual information contained in any report of 
examination or investigation submitted to or obtained by the 
Commissioner's staff shall also be made a part of the record 
unless deemed confidential by the Commissioner. 

"§ 53-232. Fees. --Each bank holding company subiect to this 
act shall pay the following fees: 

(a) An initial registration fee of t1,000. 

(b) An annual registration fee of $750.00. 

(c) A fee of $50.00 for the issuance of any certified copies 
of documents plus $1.00 per page over a number of pages specified 
by the Commissioner." 

Sec. 2. G. S. 7&-29(a) is amended by inserting the words 
"the Comaissioner of Banks pursuant to Articles 17 and 18 of 
Chapter 53 of the General Statutes," after the words "the North 
Carolina Utilities Commission". 

Sec. 3. The guestion of the extent of authority beyond 
that conferred by Article 17 upon the Commissioner of Banks with 
regard to the acquisition of a North Carolina bank or bank 
holding company by an out-of-state regional bank holding company 
is referred to the Committee on Taxation and fiegulation of Banks, 
Savings and Loan Associations, and Credit Onions of the 
Legislative Research Commission for study and report to the 1985 
Session of the General Assembly. 

Sec. a. Article 17 of Chapter 53 of the General 
Statutes contained in Section 1 of this act shall become 
effective January 1, 1985. The rest of this act is effective 
upon ratification. 

In the General Assembly read three times and ratified, 
this the 7th day of July, 1984. 



JAMES C. GREEN 



James C. Green 
President of the Senate 



LISTON B RAMSEY 

Liston B. Bamsey 

Speaker of the House of Representatives 



Senats Bill 706 

C-10 



APPENDIX D 

GENERAL ASSEMBLY OF NORTH CAROLINA 

1983 SESSION (REGULAR SESSION, 1984) 

RATIFIED BILL 



CHAPTEK 1087 
SENATE BILL 807 
AN ACT TO PEHMIT INTEBSTATE HEBGBHS AND ACQOISITIONS OF SAVINGS 
AND LOAN ASSOCIATIONS AND SAVINGS AND LOAN HOLDING COMPANIES ON 
A BECIPBOCAL BASIS HITHIN A SPECIFIED BEGION. 
The General Asseably of North Carolina enacts: 

Section 1. . Chapter 54B of the General Statutes is 
aaended by adding a new Article 3A to read as follows: 

"Article 3A. 

"North Carolina Begional Beciprocal Savings 

and Loan Acguisition Act. 

"§ 54B-U8.1., Title .T-This Article shall be known and nay be 

cited as the North Carolina Begional Beciprocal Savings and Loan 

Acquisition Act. . 

"ft 54B-48.2. Definitions . — Notwithstanding the provisions of 
G. 5. .54B-4, as used in this Article, unless the context reguires 
otherwise: 

(1) •Acquire', as applied to an association or a 
savings and loan holding company, aeans any of the 
following actions or transactions: 

a. . The nerger or consolidation of an association 
with another association or savings and loan 
holding company or a savings and loan holding 
company with another savings and loan holding 
conpany. . 

b. . The acquisition of the direct or indirect 
ownership or control of voting shares of an 
association or savings and loan holding 
company if, after the acqaisition, the 
acquiring association or savings and loan 
holding company will directly or indirectly 
own or control more than five percent (5%) of 
any class of voting shares of the acquired 
association or savings and loan holding 
company. 

c. The direct or indirect acquisition of all or 
substantially all of the assets of an 
association or savings and loan holding 
company. . 

d, . The taking of any other action that would 

result in the direct or indirect control of an 
association or savings and loan holding 
company. 

(2) 'Administrator' means the Administrator of the 
Savings and Loan Division, 

(3) 'Association' means a mutual or capital stock 
savings and loan association, building and loan 
association or savings bank chartered under the 
laws of any one of the states or by the Federal 
Home Loan Bank Board, pursuant to the 'Home Owners' 

D-1 



Loan Act of 1933V- 12 U.S.C. Section T464, as 
amended. 
{H) 'Branch office* means any office at which an 

association accepts deposits. The ter iq branch 
office does not include: 

a. , Onoanned autoaatic teller nachines, point-of- 

sale terminals, or siailar unmaDned electronic 
banking facilities at which deposits may be 
accepted; 

b. Offices located outside the United States; and 

c. Loan production offices, representative 
offices, service corporation offices, or 
other offices at which deposits are not 
accepted. . 

(5) 'Company* means that which is set forth in the 
Federal Savings and Loan Holding Company Act, 12 
0« S.C. .Section 1 730a (a) ( 1) (C) , as amended. 

(6) 'Control* means that which is set forth in the 
Federal Savings and Loan Holding Company Act, 12 
0. S.C. . Section 1?30a (a) (2) , as aaended. 

(7) "Deposits' means all detaand, time, and savings 
deposits, without regard to the location of the 
depositor: Provided, however, that 'deposits* 
shall not include any deposits by associations.. 
For purposes of this Article, determination of 
deposits shall be made with reference to regulatory 
reports of condition or similar reports made by or 
to State and federal regulatory authorities. . 

(8) "Federal association* means an association 
chartered by the Federal Home Loan Bank Board 
pursuant to the "Home Owners* Loan Act of 1933*, 12 
0. 5. C. Section 146(4, as amended.. 

(9) * North Carolina association* means an association 
organized under the laws of the State of North 
Carolina or under the laws of the Onited States and 
that: 

a. . Has its principal place of business in the 
State of North Carolina; 

b. . Which if controlled by an organization, the 
organization is either a North Carolina 
association. Southern Region association. 
North Carolina savings and loan holding 
company, or a Southern Region savings and loan 
holding company; and 

c. . Hore than eighty percent (80*) of its total 
deposits, other than deposits located in 
branch offices acguired pursuant to Section 
123 of the Garn-St Germain Depository 
Institutions Act of 1982 (12 O.S.C- 1730a(m)) 
or comparable state law, are in its branch 
offices located in one or more of the Southern 
Region states. . 

(10) *North Carolina Savings and Loan Holding Corapany' 
means a savings and loan holding company that: 



Senate Eiii 807 



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a. . Has its principal place of business in the 
State of North Carolina; 

b. . Has total dt^posits of its Southern Beciion 
association subsidiaries and North Carolina 
association subsidiaries that exceed eighty 
percent (80%) of the total deposits of all 
association subsidiaries of the savings and 
loan holding conpany other than those 
association subsidiaries held pursuant to 
Section 123 of the Garn-St Gernain Depository 
Institutions Act of 1982 (12 0. S.C. 1730a(B) ) 
or coaparable state law. 

(11) "Principal place of business* of an association 
means the state in vhich the aggregate deposits of 
the association are the largest. For the purposes 
of this Article, the principal place of business of 
a savings and loan holding conpany is the state 
where the aggregate deposits of the association 
subsidiaries of the holding company are the 
largest. . 

(12) •Savings and loan holding company' means any 
coBpany which directly or indirectly controls an 
association or controls any other company which is 
a savings and loan holding company. 

(13) 'Service Corporation* means any corporation, the 
majority of the capital stock of which is owned by 
one or more associations and which engages, 
directly or indirectly, in any activities which may 
be engaged in by a service corporation in which an 
association may invest under the laws of one of the 
states or under the laws of the Onited States. 

(14) •Southern Region association' means an association 
other than a North Carolina association organized 
under the laws of one of the Southern Region states 
or under the laws of the Onited States and that: 

a. , Has its principal place of business only in a 
Southern Region state other than North 
Carolina; 

b. , Mhich if controlled by an organization, the 
organization is either a Southern Region 
association or a Southern Region savings and 
loan holding company; and 

c. More than eighty percent (80%) of its total 
deposits, other than deposits located in 
branch offices acquired pursuant to Section 
123 of the Garn-St Germain Depository 
Institutions Act of 1982 (12 O.5.C. 1730a(m)) 
or comparable state law, are in its branch 
offices located in one or more of the Southern 
Region states. 

(15) 'Southern Region savings and loan holding company' 
means a savings and loan holding company that: 

a. . Has its principal place of business in a 
Southern Region state other than the State of 
North Carolina; 



Senate Bill 807 



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b. Has total deposits of itr. Southern Ueqiori 

association subsi <li nr i«v; and North carol in.» 
association subs id La t i<^s that «'Kt:«'<'d <i<|h«y 
percent (80%) of the total deposits of all 
association subsidiaries of the savinqs and 
loan holding conpany other than those 
association subsidiaries held pursuant to 
Section 123 of the Garn-St Geraain Depository 
Institutions kct of 1982 (12 U. 5.C. 1730a(Bi) ) 
or coaparable state law. 

(16) 'Southern Hegion states' i^eans the states of 
Alabama, Arkansas, Florida, Georgia, Kentucky, 
Louisiana, Maryland, Mississippi, North Carolina, 
Sooth Carolina, Tennessee, Virginia, West Virginia, 
and the District of Coluabia, , 

(17) 'State' laeacs any state of the United States and 
the District of Columbia. 

(18) 'State association' aeans an association organized 
under the laws of one of the states. 

(19) 'Subsidiary* means that which is set forth in the 
Federal Savings and Loan Holding Company Act, 12 
O.S-C. Section 1 730a (a) ( 1) (H) , as amended. 

"5 54 B- 48. 3. Acquisitions by Souther n Beqio n savings and l oan 
holding com panies and Southe rn E egion association s. — (a) A 
Southern Eegion savings and loan holding coopany or a Southern 
Eegion association that does not have a North Carolina 
association subsidiary (other than a North Carolina association 
subsidiary that was acquired either pursuant to Section 123 of 
the Garn-St Germain Depository Institutions Act of 1982 (12 
D. S. C. 1 730a («)) , or coaparable provisions in state law, or in 
the regular course of securing or collecting a debt previously 
contracted in good faith) nay acquire a North Carolina savings 
and loan holding coeapany or a North Carolina association with the 
approval of the Ad ninistrator. . The Southern Eegion savings and 
loan holding coapany or Southern Region association shall submit 
to the Adninistrator an application for approval of such 
acquisition, which application shall be approved only if: 

(1) The Adainistrator determines that the laws of the 
state in which the Southern Eegion savings and loan 
holding coapany or Southern Eegion association 
Baking the acquisition has its principal place of 
business permit North Carolina savings and loan 
holding companies and North Carolina associations 
to acquire associations and savings and loan 
holding companies in that state; 

(2) The Administrator deteriaines that the laws of the 
state in which the Southern Region savings and loan 
holding coapany or Southern Region association 
naking the acquisition has its principal place of 
business permit such Southern Region savings and 
loan holding company or Southern Region association 
to be acquired by the North Carolina savings and 
loan holding company or North Carolina association 
sought to be acquired; 



Senate Bill 807 



(3) The Adninistrator deteLoines either that the North 
Carolioa association sought to be acquired has been 
in existence and continuously operatinq for more 
than five years or that ail ol the as:;<)<:iat loii 
subsidiaries of the North Carolina savings and loan 
holding coapany sought to be acquired have been in 
existence and continuously operating for aore than 
five years: Provided, that the Administrator may 
approve the acquisition by a Southern Rotjion 
savings and loan holding conpany or Southern Region 
association of all or substantially all of the 
shares of an association organized solely for the 
purpose of facilitating the acquisition of an 
association that has been in existence and 
continuously operating as an association for more 
than five years; and 

(4) The Adainistrator aakes the acquisition subiect to 
any conditions, restrictions, requirements or other 
liaitations that would apply to the acquisition by 
a North Carolina savings and loan holding company 
or North Carolina association of an association or 
savings and loan holding conpany in the state where 
the Southern Begion savings and loan holding 
coapany or Southern Region association making the 
acquisition has its principal place of business but 
that would not apply to the acquisition of an 
association or savings and loan holding company in 
such state by an association or a savings and loan 
holding coapany all the association subsidiaries of 
which are located in that state; 

(5) With respect to acquisitions involving the merger 
or consolidation of two associations resulting in a 
Southern Region association, the application 
includes a business plan extending for an initial 
period of at least three years from the date of the 
acquisition which shall be renewed thereafter for 
as long as nay be required by the Administrator. 
The association aay not deviate without the prior 
written approval of the Ad ainistrator froa the 
business plan which shall address such matters as 
the Administrator may deem appropriate for the 
protection of the depositors and menbers of the 
acquired North Carolina association and the general 
public. The business plan shall address, without 
limitation: 

a. insurance of depositors' accounts. 

b. limitation of services and activities to those 
permitted under this Chapter to North Carolina 
associations. 

c. conversion of corporate form or other 
fundamental changes. 

d. closing, selling or divesting any or all North 

Carolina branches. 

e. . protection of the voting rights of North 

Carolina aeabers. 



Senate Bill 807 



D-5 



(b) A Southern Region savinqs and loan holdinq coapany or 
Soathern Begion association that has a North Carolina association 
subsidiary (other than a North Carolina association subsidiary 
that was acquired either pursuant to Section 123 of the Garn-St 
Germain Depository Institutions Act of 1982 {12 0. S. C. 1730a (b)), 
or coaparable provisions in North Carolina law, or in the regular 
course of securing or collecting a debt previously contracted in 
good faith) Bay acquire any North Carolina association or North 
Carolina savings and loan holdinq company with the approval of 
the Administrator. . The Southern Begion savings and loan holding 
conpany shall submit to the Administrator an application for 
approval of such acquisition, which application shall be approved 
only if: 

(1) The Administrator determines either that the North 
Carolina association sought to be acquired has been 
in existence and continuously operating for morp 
than five years or that ail of tho association 
subsidiaries of the North Carolina savings and loan 
holding coapany sought to be acquired have been in 
existence and continuously operating for nore than 
five years: Provided, that the Administrator may 
approve the acquisition by a Southern Region 
savings and loan holding company or Southern Region 
association of all or substantially all of tho 
shares of an association organized solely for the 
purpose of facilitating the acquisition of an 
association that has been in existence and 
continuously operating as an association for more 
that five years; and 

(2) The Administrator makes the acquisition subject to 
any conditions, restrictions, requireaents or other 
limitations that would apply to the acquisition by 
the North Carolina savings and loan holding company 
or North Carolina association of an association or 
savings and loan holding company in the State where 
the Southern Begion savings and loan holdinq 
company or Southern Begion association making the 
acquisition has its principal place of business but 
that would not apply to the acquisition of an 
association or savings and loan holding company in 
such state by a savings and loan holdinq coapany 
all the association subsidiaries of which are 
located in that state. 

(3) aith respect to acquisitions involving the merger 
or consolidation of two associations resulting in a 
Southern Begion association, the application 
includes a business plan extending for an initial 
period of at least three years froa the date of the 
acquisition which shall be renewed thereafter for 
as long as aay be required by the Administrator. . 
The association may not deviate without the prior 
written approval of the Adainistra tor from the 
business plan which shall address such matters as 
the Administrator aay deea appropriate for the 
protection of the depositors and aembers of the 

6 senate Bill 8 07 



D-6 



acquired North Carolina association and the qeneral 
public. The business plan shall address, without 
liBitation: 

a. insurance of depositors' accounts. 

b. . limitation of services and activities to those 

pernitted under this Chapter to North Carolina 
associations. 

c. conversion of corporate form or other 
fundamental changes. 

d. . closing, selling or divesting any or all North 

Carolina branches. 

e. protection of the voting rights of North 
Carolina members. 

(c) The Administrator shall rule on any application submitted 
under this section not later than 90 days following the date of 
submission of a complete application. If the Administrator fails 
to rule on the application within the requisite 90-day period, 
the failure to rule shall be deemed a final decision of the 
Administrator approving the application. 

"6 54&-t»8.4. Exceptions. — A North Carolina savings and loan 
holding company, a North Carolina association, a Southern Hegion 
savings and loan holding company, or a Southern iJegion 
association may acquire or control, and shall not cease to be a 
North Carolina savings and loan holding company, a North Carolina 
association, a Southern Region savings and loan holding company, 
or a Southern Region association, as the case may be, by virtue 
of Its acquisition or control of: 

(1) An association having branch offices in a state not 
within the reqion, if such association has been 
acquired pursuant to the provisions of Section 123 
of the Garn-St Germain Depository Institutions Act 
of 1982 (12 D.S.C. 1730a (m)), or comparable 
provisions of state law; 

(2) An association which is not a Southern Reqion 
association if such association has been acguired 
in the regular course of securing or collectinq a 
debt previously contracted in good faith, and if 
the association or savings and loan holding company 
divests the securities or assets acguired within 
two years of the date of acquisition. A North 
Carolina association, a North Carolina savinqs and 
loan holding company, or a Southern Region 
association may retain these interests for up to 
three additional periods of one year if the 
Administrator determines that the required 
divestiture would create undue financial 
difficulties for that association or savinqs and 
loan holdinq company. 

nc.!!! •*.!'*?" u^*!* Prohibitions. — (a) Except as may be expressly 
permitted by federal law, no savinqs and loan holdinq company 
tbat IS not either a North Carolina savings and loan holding 
company or a Southern Region savinqs and loan holding company 
snail acquire a North Carolina savings and loan holdinq company 
or a North Carolina association. 



Senate Bill 807 



D-7 



(b) Except a:; L<fquired by f »m1<;i.<i.L IdW, a North CaLolina 

savings and loan holding coapany or a Southern Region sawinqs and 
loan holding conpany that ceases to be a North Carolina savings 
and loan holding company or a Southern Region savings and loan 
holding coapany shall as soon as practicable and, in all events, 
within one year after such event divest itself of control of all 
Morth Carolina savings and loan holding coapanies and all North 
Carolina associations: Provided^, however, that such divestiture 
shall not be required if the North Carolina savings and loan 
holding conpany or the Southern aegion savings and loan holding 
company ceases to be a Horth Carolina savings and loan holding 
coBpany or a Southern Begion savings and loan holding coapany, as 
the case aay be, because of an increase in the deposits held by 
association subsidiaries not located within the region and if 
such increase is not the result of the acquisition of an 
association or savings and loan holding company. Provided 
further that nothing in this irticle shall be construed to permit 
interstate branching by associations nor to require the 
divestiture of a North Carolina association or a North Carolina 
savings and loan holding coapany by a savings and loan holding 
coapany which acquired its subsidiary North Carolina association 
or North Carolina savings and loan holding conpany prior to the 
effective date of this Article. Nor shall anything in this 
Article be construed to prohibit any savings and loan holding 
coapany which has acquired a North Carolina association or North 
Carolina savings and loan holding company prior to the effective 
date of this Article froa acquiring additional North Carolina 
associations or North Carolina savings and loan holding 
coapanies. Nor shall anything in this Article be construed to 
liait the authority of the Administrator pursuant to G. S. SUB-U^. _ 

"§ 54B-U8.6. Applicable laws , r ules and r egulatio ns. — (a) Any 
North Carolina association that is controlled by a savings and 
loan holding coapany that is not a North Carolina savings and 
loan holding coopany shall be subject to all laws of this State 
and all rules and regulations under such laws that are applicable 
to North Carolina associations that are controlled by North 
Carolina savings and loan holding coapanies. 

(b) The Administrator aay proaulgate rules, including the 
iaposition of a reasonable application and a dninistration fee, to 
implement and effectuate the provisions of this Article. 

••§ SUB- 48.7., Appeal of Administrator * s decisi on. -- 

Notwithstanding any other provision of law, any aggrieved party 
in a proceeding under G. S. . SIB-aO.J or G. S- 548-48. I (2) aay, 
within 30 days after final decision of the Adainistrator and by 
written notice to the Adainistrator, appeal directly to the North 
Carolina Court of Appeals for judicial review on the record. In 
the event of an appeal, the Administrator shall certify the 
record to the Clerk of the Court of Appeals within 30 days after 
filing of the appeal. 

"* 54 B- 48.6. Peri odic reports ; interstate a qreeaents . — (a) 
The Adainistrator may from time to time require reports under 
oath in such scope and detail as he nay reasonably determine of 
each Southern Region savings and loan holding coapany or Southern 
Begion association subject to this Article for the purpose of 



Senate Bill 807 



assuring continuing couplianco lith the pro^risions of this 
Article. . 

(1)) The Adoiaistiator Bay enter into coopeirative aqreeoents 
■itli other savings and loern regulatory authorities for the 
periodic eiaaination of any Southern Begion sayings and loan 
holding company oj: Southern Region association that has a North 
Carolina association subsidiary and nay accept reports of 
examination and other records fron such authorities in lieu of 
conducting its own ezaninations. The Administrator may enter 
into joint actions with other savings and loan regulatory 
authorities having concurrent jurisdiction over any Southern 
Begion savings and loan holding company or Southern Region 
association that has a North Carolina asj.ociat ion subsidiary or 
nay take such actions independently to carry out his 
responsibilities under this Chapter and assure conpliance with 
the provisions of this Article and the app].icabl3 laws of this 
State. . 

»* 5aB-48.g.. Enforcement . —The Adsinistrator shall have the 
pover to enforce the provisions of this Article, including the 
divestiture requirement of G. S. . 54B-48. 5 (b) , through an action in 
any court of this State or any other state or in any court of the 
United States for the purpose of obtaining an appropriate remedy 
for violation of any provision of this Article, including such 
criminal penalties as are contemplated by G. S- 5 4B-6 6. !* 

Sec. 2.. G. S. . 7A-29 (a) is amended by inserting the words 
"the Administrator of savings and loans pursuant to Article 3A of 
Chapter 54B of the General Statutes," after the words "the North 
Carolina Utilities Commission". 

Sec. . 3. Nonseverability. It is the purpose of this 
Article to facilitate orderly development of thrift organizations 
that have branch offices in more than one state within the 
Southern Region. . It is not the purpose of this Article to 
authorize acquisitions of North Carolina savings and loan holding 
companies or North Carolina associations by savings and loan 
holding companies that do not have their principal place of 
business in this State on any basis other than as expressly 
provided in this Article. Therefore, if any portion of this 
Article pertaining to the terms and conditions for and 
limitations upon acquisition of North Carolina savings and loan 
holding companies and North Carolina associations by savings and 
loan holding companies that do not have their principal place of 
business in this State is determined to be invalid for any reason 
by a final nonappealable order of any North Carolina or federal 
court of competent jurisdiction, then this entire Article shall 
be null and void in its entirety and shall be of no further force 
or effect from the effective date of such order: Provided, 
however, that any transaction that has been lawfully consummated 
pursuant to this Article prior to a determination of invalidity 
shall be unaffected by such determination. . 

Sec. U, G. S. . 548-261 (c) is rewritten to read as 
follows: 

"(cj A savings and loan holding company may invest in any 
investment authorized by its Board of Directors, except as 
limited by regulations promulgated by the Administrator pursuant 
to this Article. " 



Senate Bill 807 



D-9 



Sec. "j. A new subsection (d) is added to G- S. 51B-26 1 

to read as follows; 

"(d) any entity which controls a state stock association, or 
acquires control of a state stock association, is a savings and 
loan holding company." 

Sec. 6. Article 11 of Chapter 54B of the General 
Statutes is repealed. 

Sec. 7, Section 6 of this act is effective upon 
ratification. Sections 1 through 5 shall become effective on the 
earlier of: 

(1) the date on which legislation becomes effective in 
one of the states listed in G. S. 54B-48.2(16) which authorizes 
regional acquisitions of savings and loan associations and 
savings and loan holding companies on a reciprocal basis and 
which applies to savings and loan associations and savings and 
loan holding companies in Horth Carolina; or 

(2) July 1, 1986. . 

In the General Assembly read three times and ratified, 
this the 5th day of July, 1984. 



JAMES C. GREEN 



James C. Green 
President of the Senate 



LISTON B. RAMSEY 



Liston B. Bamsey 

Speaker of the House of Representatives 



10 Senate Bill 807 



D-10 









3§ " 1 












=!;•:: 



11 j.l 



S tS S u- s 






APPENDIX F January 11, 1984 

A liKIII IIIMIJHY HI SIAII HANK MJI'I H V I '■ I I' N |N NIIKIII lAKllllNA 
BY: James S. Currie, Commissioner of Banks 

Ihe duty of the State to supervise banks was not recognized by the Grneral 
Assembly until 1887, at which session banks operating in North Carolina were 
required to make reports to the State Treasurer at least twice each year, and 
r.omo limited authority was given to make special examinations to determine a 
bank's solvency. 

The first consolidated statement of the banks of the State was made by 
the State Treasurer in 1887, and the total resources were slightly more than 

$3, DUO, 000. 

At the session of 1899 the Corporation Commission was created, and the 
supervision of banks was placed under its jurisdiction. Prior to creation of 
the Corporation Commission all corporations, including banks, were chartered 
by the General Assembly, 

In rj(J3 the tcMjisiaturo cjavc the Corpuriition Commission authority to make 
rules to govern banks, provided such rules were not inconsistent with the banking 
law. 

The General Assembly of 1921 enacted the first real statutes with reference 
to SLjpervision and examination of banks, including discretionary powers to refuse 
hank rhartcr:;, prnvidinq for tlie organization of a Rankincj Department witliin 
the Corporal iort Comini :;;;iun , and the naming of a Chief State Bank Lxaminer. 



placing tlie 
on. This method 
factory. 



riic General Assembly of 1927 passed the Liquidation Act, 
lujuidntion of all closed banks under the Corporation Commissi 
of liquidating closed banks has been proved to be very satisfa 

The Seawell Bill passed by the 1931 General Assembly and ratified on April 2, 
1931, created the position of Commissioner of Banks, and gave him the duties, 
power and authority to supervise and liquidate all State Banks which had been 
exerc-iscd by the Corporation Commission since 1899. This Bill also provided 
for an Advisory Commission to consist of the State Treasurer, Attorney General, 
two practical bankers and one business man. 

The authority to license banks to do a trust business was transferred 
from ttie Insurance Commissioner to the Commissioner of Banks at the 1931 session, 
and provision was made for a closer supervision of trust business in the future. 

fhe 1939 session of the General Assembly created ttic State Banking Commis- 
sion \iyhich superseded the Advisory Commission to the Commissioner of Banks, 
l)L"i-iiniinq effc^ctive April 1, 1939. This Commission consisted of the State Treasurer 
af\d tlie Attorney General as ex officio members, the State Treasurer to serve 
as Chairman of the Commission, and five members appointed by the Governor, four 
of whom were practical bankers and one a business man who is not an executive 
officer of any bank, the appointive members serving for a period of four years. 

Since May 27, 1931, there have been eight Commissioners of Banks, including 
ttie present Commissioner, James S. Currie, who has served since September 1, 
1978. 



F-1 



Ihe Sl.yLo liankiruj Commission is today comprised of 15 members cjs folio\i/s: 

(a) Stale Treasurer, Chairman and ex officio member. 

(b) tiqht public members. Seven appointed by ttic Governor niul 
one appointed by the General Assembly upon recommendation 
of the Speaker of the House of Representatives. 

(c) Six practical banker members. Five appointed by the 
Governor and one appointed by the General Assembly upon 
recommendation of the President of the Senate. 

The Commissioner of Banks is appointed for four-year terms by the Governor 
subject to confirmation by the General Assembly in joint session. 

Attached is a list of the State Banking Commission as it is presently 
constituted. 

Today, in addition to supervision over state banks, the Commissioner of 
Banks is responsible for licensing and supervising consumer finance companies, 
tlie sales of checks and money orders, and funeral and burial trust funds. [here 
are 90 consumer finance licensees operating at 573 locations in North Carolina. 
There are 372 funeral and burial trust fund licensees. 

There are presently 20 National banks with 869 branches in North Carolina, 
and the 30 State banks have 918 branches. We also have two state trust companies 
which do not accept deposits. 

Attached is a listing of all banks in North Carolina, both National and 
Stale. These schedules show the banks ranked by assets and by deposits as of 
September 30, 1983, which is the latest date available. You will note that 
the three largest banks, NCNB, Wachovia and First Union National, have b^ .kl% 
of all deposits and 60.58?o of all commercial bank assets in North Carolina. 
These banks are National banks which are not under the jurisdiction of the 
Commissioner of Banks or the General Assembly. 



F-2 



STATK BANKING COMMISSION 



Tlu' Hon(.r,)l)lo llail.in E. 
( li,\ i nn.m , St ;U c IVniking 
325 North Salisbury Stre 
Raleigh, North Carolina 



Ilovlos 
Commissior 



27611 



Mr. John C. Roll , Jr. 

Member, State Banking Commission 

r-'st 01 f ice Box 6^1 

Wilson. North Carolina 27893 

Mr. W. Frank Coiner 

Member. State Ranking Commission 

»(U Blessing Drive • 

Dobson. North Carolina 27017 

Ml . Puna Id A. iJ.ivis 

Member, State Ranking Commission 

Post Office Box 1007 

Raleigh, North Carolina 27602 

Mr. Robert H. Gage 

Member, State Banking Commission 

Id Ci^l lege Street 

Morganton, North Carolina 28655 

Mr. C. 1 rank Cr i I I in 

^lember, State Banking Commission 

Tost Of f ice Drawer 99 

Monroe, North Carolina 28110 



D. "Zander" Guy 
. State Banking Commission 



Post 01 t ice Box 'iUO 

511 New Br idge St reet 

Jacksonville, North Carolina 28540 



■ Mr. Steven A. Hockfield 
Member, State Banking Commission 
Suite loo Civic Plaza 
801 E. Trade Street 
Charlotte, North Carolina 28202 

■•■ Mr. Paul L. Jones 

Member, State Banking Commission 

Post Office Box 3334 

Kinston, North Carolina 28501 

•• Mr. Jop I . Marshal 1 

Member, State Banking Commission 

Post Office Sox 610 

Madison, North Carolina 27025 

" Mr. Robert V. Owens, Jr. 

Member, State Banking Commission 

Route 1 , Box 729 

Nags Head, North Carolina 27959 

"•'■■ Ms. Helen Ann Powers 

Member, State Banking Commission 
Crowfields Drive CC-2 
Asheville, North Carolina 28803 

"■ Mr. J. J. Sansom, Jr. 

Member, State Banking Commission 

Post Office Box 1932 

Durham, North Carolina 27702 



Mrs. Kitherine Harper 

Member, State Banking Commission 

r(^sL Of f ice Box 1 1411 

Charlotte, North Carolina 28220-1411 



•■•-■ Mr. E. Rhone Sasser 

Member, State Banking Commission 

Post Office Box 632 

Whiteville, North Carolina 28472 



^s 4-1-85 
^s 4-1-87 



December 21, 1983 



F-3 



ilNSTON-SftLIM 

c:'ARLo:r: 

NORTH tflLKSSB 

RAIEUH 

V I IS ON 

vvHITEVILLE 

lUMBZRIDM 

P.OCKy ^O'JNT 
SA.NFORD 
SALISPURr 
"IJ^ POINT 

ifxin:-tom 

fuc'jay-varin^ 

davidson 

^■CUr'i OIIVE 



BANK N/».ME 

A'ACHOVIA BANK ANE TR 
ilZlh NATIONAI BANK 
FIRST UNION NATIONAL 
TBE NORTHVESTEHN BAN 
FIRST-CITIZENS BANK 
BRANCH BANKING ANT T 
UNITED CAROLINA BANK 
SOUTHERN NATIONAL BA 
OEMTRAL CAROLINA BAN 
PEOPLES BANK 5. TRUST 
THE PLANTERS NiTIONA 
THE CAROLINA BANK 
SECURITY BANK AND TR 
HIOH POINT BANK AND 
LEXINiTCN STATE BANK 
THE FIDtLIT'f BANK 
FIECi'^ONT BANK AND TR 
SOUTHERN BANK AND TR 



/DEPOSITS 


SHARE 


CL 


4: 


737,600 


20.23 


N 


4 


752,^62 


20.12 


N 


3 


,104,534 


13.12 


f! 


1 


950,573 


8.24 


N"^ 


1 


,644,120 


6.95 


NM 


1 


,449,531 


6.12 


NM 




854,221 


3.51 


NY, 




319.129 


3.45 


N 




699,691 


2. £5 


N 




493,333 


2.11 


Nr. 




437,052 


1.55 


N 




210,135 


3.39 


NM 




133,512 


0.80 


m 




142,997 


3.52 


N^ 




123,353 


0.54 


NM 




110,071 


0.47 


NT'' 




108,493 


0.46 


SM 




97,435 


0.41 


N^' 



5950 


y? 


ORANIIE FALLS 


4910 


NC 


3-'EL3Y 


4379 


"C 


ASHE50R0 


?^3?1 


NC 


RALEIOti 


2017 


NO 


INOELHARC 


2^537 


NC 


CHARLOTTE 


4905 


NC 


REIDSVILLE 


1^013 


NC 


OXFORD 


5955 


NC 


CATAVBA 


15019 


NC 


T = OY 


4333 


SC 


CONCORD 


12255 


NC 


EUR HAM 


14 54i 


NC 


3ATESVILLS 


2035 


^!C 


SRAM HE OUARR 


p^ccp 


NC 


SAN FORE 


15117 


NC 


ROCKINSRA^ 


312 


NC 


CONCORD 


'3145 


NC 


OREENSBORO 


375 


NC 


rflNIERVILLE 



BANK OF uRANITE 
TEE FIRST NATIONAL B 
THE FIRST NATIONAL E 
STATE BANK OF RALEIJ 
THE EAST CAROLINA EA 
REPUBLIC BANK 5. TRUS 
FIRST NATIONAL TANK 
TBE UNION NATIONAL B 
PEOPLES BANK 
BANK OF MONTGOMERY 
TBE CONCORD NATIONAL 
MECHANICS ^ FARMERS 
TARHEEL BANK S. TRUST 
FARMERS ■; MERCHANTS 
MID-SOUTH BANK AND T 
RICHMOND COUNTlf BANK 
CITIZENS NATIONAL 3A 
COMMUNITY BAN!^ OF CA 
FIRST STATE BANK 



36,762 





37 


NM 


75,230 





32 


N 


71,095 





30 


N 


59,753 





29 


NM 


69,232 





29 


NM 


67,573 





29 


NM 


63,364 





27 


N 


53,199 





25 


N 


54.142 





23 


NM 


51,209 


e 


22 


NM 


49,094 





21 


N 


49,473 





.20 


NM 


46,250 





23 


NM 


45,273 





19 


NM 


44,436 





.19 


NM 


42,449 


3 


.lb 


NM 


42,093 





.15 


N 


42,333 





.18 


NM 


40,291 


3 


.17 


NM 



'A'/i-CiS30R3 

PUCr MOUKTAI 
*'INSr3N-SUFM 

S^irtiFIELIJ 
rllCT .'iOUNTAI 

3RAHA^ 
:"E?.RlfVTLLE 

3f?EtN3BOf?n 

A.SFFE03 3 

'^HIPFVILLE 

'■IJKLANCS 

?OLIR OAfS 
LA.KDIS 



I^ARMERS BAN-< OF S'JNB 
THE FIRST NATIONAL B 
THE HERITAGE BAf.K 
BAN'K OF PILOT MCUNTA 
CITIZENS NATIDNAL BA 
FIRST NATIONAL BANK 
FARRIERS BANK 
THE BANK OF CQRRITUC 
BANK OF ALAMANCE 
CHERRYVILIE NATIONAL 
YADKIN VALLEY BANK A 
TRIAD BANK 
CANAL TRUST COMPANY 
RA\'DCIPS BANK 5. TRQS 
COLUMBUS NATIONAL BA 
CAROLINA MOUNTAIN ^^A 
AVERY COUNTY BANK 
BANK OF FOUR OAKS 
MERCHANTS i FARMER'S 



*3.233 


0.17 


NM 


38 


36.965 


e.ie 


N 


39 


36.330 


2.15 


NM 


40 


35,251 


0.15 


NM 


41 


31,159 


3.13 


N 


42 


31,110 


0.13 


N 


43 


?B,724: 


0.12 


NM 


44, 


25,774 


0.11 


NM 


45, 


24,471 


0.10 


NM 


46, 


24,392 


3.10 


N 


47. 


23,125 


0.10 


NM 


48, 


22,B22 


0.10 


NM 


49, 


22,522 


0.10 


M 


52. 


22,234 


0.09 


NM 


51. 


18.932 


0.09 


N 


52. 


lB,37e 


0.09 


NM 


53. 


ia,22? 


0.05 


NM 


54. 


17,230 


0.07 


NM 


55. 


15,229 


2.35 


NM 


56. 



D'MHAM 
^■:i^H POIf.T 
CHAPEL HILL 

ASH?VILLE 

CHARLCriE 

P ? M '^ R C r' E 

PINE EFVET 

"^OREHI'ilD CITY 

CANTOR 

BI ACt'i'^?Rj 

MNCOINTON 

B'JRLINJIDN 

KAYFTTEi/IIIE 

SPApi^SVILLE 

^■■;rphy 

f^FFMDAFL I'JDE^ =^0.11: 



^JARANIY, STATE BANK 
CENTRAL SAVINGS BANK 
ISE VILLAGE BANK OF 
CREFNSEORO NATIONAL 
FIRST COMMERCIAL BAN 
^ETROLINA NATIONAL B 
LL'MBFE BANK 
BANK OF FINE LEVEL 
COUNTY BANK fi TRUST 
THE BANK OF CANDOR 
TPE BAN'^ 0? BLAEENBO 
LINCOLN BANK OF NORT 
TiE MORRIS PLAN INDU 
•JNIIEC NATIONAL BANK 
TRE BANK OF IREDELL 
CITIZENS BANK 



14,696 

14,271 

14,138 

11,900 

13,246 

10,111 

9,653 

S,452 

3,553 

7,651 

7,231 

5,061 

4,411 

4,051 

3,992 

3,117 



0.05 
0.06 
0.05 
0.05 
0.24 
2.04 
0.04 
0.04 
0.04 
3.23 
0.03 
0.22 
0.22 
0.02 
3.22 
0.01 



23,669,500 TOTAL 



NM 
NM 
NM 

NM 
N 
NM 
NM 
NM 
NM 
NM 
NM 
NM 
N 
NM 
NM 



57 
55 
59 
60 
51, 
62, 
63, 
54, 

65. 

66. 

67. 

69. 

69. 

70! 

71. 

72. 



F-5 



CFRT 


3^ 


CITy 


i992 


N'C 


CH^RLCrii 


917 


f^C 


*nST0N-3ftLE^1 


4?35 


n: 


CHASLorrs 


15535 


\'C 


NORTH ilILKESB 


11^53 


NC 


RALCIJH 


934e 


"■Z 


*II.SCN 


2325 


NC 


*'HIT£VILLE 


4393 


n: 


Lay,?SRr:N 


2035 


V3 


d'Jrp.a:^ 


59i2 


NG 


RCCKr YCQNT 


43f"7 


\'C 


RvCCY HC-JNI 


2^29 


NC 


5/i.NFORD 


9355 


n: 


SALISBJRr 


122?7 


N'C 


Hi:.H PC I NT 


5953 


NC 


CAVILSOiN 


17793 


NC 


LFxrr.rcv 


11527 


NC 


F-JO'JAI-VARINA 


15359 


NC 


^j-JiNT DLI7i. 



BANK NAMi 

NCNB NATIONAL BANK 
■rfACHOVIA BANK AND TR 
FIRST -JNION NATIONAL 
THE NORTKirfESTERN BAN 
FIRST-CITIZENS BANK 
BRANCH BANfCINa ANE T 
UNITED CAROLINA BANK 
SOJTHERN NATIONAL BA 
CENTRAL CAROLINA BAN 
PEOPLES BANK S. TRUST 
T'ei PLANTERS NATIONA 
THE CAROLINA BANK 
SEC'JRITr BANK AND TR 
EISE POINT BANK ANE 
PIEE^Cin BANK AND TR 
LiXirJCrCN STATE BANK 
TRE FIEELITYBANK 
SOUTHERN BANK AND TR 



RC/ASSiTS 


SHARE 


CI RA: 


7,274,332 


22.40 


N 


6,407,731 


19.73 


N 


5,392,734 


18.45 


N 


2,415,300 


7.44 


NM 


1,95^,573 


5.79 


NM 


1,544,944 


5.27 


NM 1 


939,355 


3.05 


NM 


931,327 


2.73 


N 


797,192 


2.45 


N 


533,125 


1.79 


NM 1 


521,397 


1.55 


' N 1 


256,399 


0.79 


NM 1 


213,713 


2.55 


NM 1 


151,335 


2.52 


NM 1 


152,333 


0.47 


SV 1 


144.550 


2.45 


NM 1 


124,173 


0.33 


NM 1 


113,331 


0.34 


NM 1 



5952 -JC 

4312 NC 

''Ties? VC 

4S79 NC 

P:?9S1 N'C 

201? NC 

4925 NC 

1?013 NC 

5955 NC 

1521? S'C 

4935 fJC 

12255 NC 

14544 NC 

2235 NC 

21652 \'C 

15117 *1C 

312 NC 

22145 NC 

375 NC 



CRANITL FALLS 

S^ELBif 

C il A R L 3 r r E 

ASHEBORO 

RAIEna 

FNCELHARE 

REIDSv'ILLE 

OXFORD 

CATAaBA 

TROy 

CONCORD 

DURHAM 

CATKS^ILLE 

CRAM IE 3UARR 

3ANE0RD 

ROCKINCHAM 

CONCORD 

aREENSEORC 

aTNTERVILLE 



BANK Of GRANITE 
THE FIRST NATIONAL B 
REPUBLIC BANK ^ TRUS 
THE FIRST NATIONAL E 
STATE BANK OF RALEIG 
THE EAST CAROLINA EA 
FIRST NATIONAL BANK 
THE UNION NATIONAL 3 
PEOPLES BANK 
BANK OF MONTGOMERY 
TH^ CONCORD NATIONAL 
MECHANICS i FARMERS 
TARHEEL BANK ^ TRUST 
FARMERS & MERCHANTS 
MID-5CUTH BANS AND T 
RICHMOND CCUNT'f BANK 
CITIZENS NATIONAL BA 
C3MMUNITY BANK OF CA 
FIRST STATE BANK 



F-6 



93,563 


e.30 


NM 


95,160 


3.33 


N 


33,523 


0.26 


NM 


P.2,271 


0.25 


N 


75,737 


0.24 


NM 


76,136 


0.23 


NM 


73, 332 


0.22 


N 


63*. 467 


0.21 


N 


52,534 


0.19 


NM 


57,337 


0.1c 


NM 


55,90? 


0.17 


N 


54,315 


0.17 


NM 


5 2,857 


3.16 


NM 


52.473 


2.16 


NM 


49,759 


0.15 


NM 


49,132 


0.15 


NM 


47,392 


0.15 


N 


47,156 


0.15 


NM 


45,351 


0.14 


NM 



373 VC 
4?1? H2 



S'JNBURY 
' AE ESBORO 

riLOT\-.OJ^TAI 
SMirKFlELC 
A'IN'3T0^--SALZM 
FILOr MD'JMAI 

iRAHAM 

C'U"?RlfVILLE 

?LKTN 

NIVIANC 
A^irSVILLE 
FOUR Z^KS 

LANCI3 



FARMERS BANfC Of SUN'* 
TFIE FIRST NATIONAL B 
THE HEHITAaE BANK 
EANK OF PILOT MOUNT& 
FiaST NATIONAL BAN^: 
CITIZENS NATIONAL Bh 
FARMERS I3ANK 
IKE BANFC CF CURHITUC 
BANK CF ALAMANCE 
CHIRRyviILE NATIONAL 
IfADKIN VALLEY BANK k 
TRIAD BANK 
CANAL TRUST COMPANY 
RANCOLPH 3ANK S. TRUS 
A Vary COUNTY EANK 
COLUMBUS NATIONAL BA 
BaV^ OF FOUR OA^'"^ 
CAROLINA MOUNTAIN EA 
MERCHANTS i FARMERS 



43,234 
42,153 
41,952 
39,45G 
37.B33 
35,374 
32,123 
29, £33 
C3,757 
27,291 
25,214 
26,140 
25,142 
25,44? 
22,417 
21,559 
20,094 
1£,=22 
17,701 



e.l3 

0.13 
0.13 
0.12 
2.12 
0.11 
0.10 
0.09 
0.09 
0.03 
2.ZS 
0.03 
0.09 
0.03 
0.07 
0.07 
0.05 
0.25 
0.05 



NM 

N 
NM 
NM 

N 

N 
NM 
NM 
NM 

N 
NM 
NM 
NI 
NM 
NM 

N' 
NM 
NM 
NM 



38 
39, 
.40, 
41, 
42. 
43. 
44, 
45. 
46. 
47. 
49. 
49. 
50. 
51. 
52. 
53. 
54. 
55. 
56. 



Zh!i?ll HILL 

RIaH POINT 

DURHAM 

CHARLOTTE 

-RZENSBCRO 

ISHEVILLE 

Pi^BROKE 

PINE LEi'EI 

''CREKESD CITY 

PIAD^NBORO 

CANDOR 

DUCOLNTON 

SrAIfS^-ILLE 

BURLINCTON 

MURf Hr 

FAYETTE-^IILE 
,^„„ 09/30/93 
■E^i;E\'DA;iI INDEX = 0.n7 



THE VILLAGE BANK OF 
CENTRAL SAVINJS BANK 
GUARANTY STATE BANK 
METROLINA NATIONAL B 
^REENSBBRO NATIONAL 
FIRST COMMERCIAL BAN 
LUMBEE BANK 
BANK OF PINE LEVEL 
COUNTY EANK S TRUST 
IBE BM.f OF BLAD5NB0 
THE BANK CF CANDOR 
LINCOLN BANK OF NORT 
THE BANK OF IREDELL 
TiiE MORRIS PLAN INDU 
CITIZENS EANK 
UNITED NATIONAL BANK 



16,933 

16,612 

ie,3S3 

14,432 

13,457 

13,392 

10,908 

10,348 

9,402 

3,599 

3,e58 

5,535 

5,995 

5,397 

4,332 

4,213 



0.25 

0.05 

0.05 

0.04 

0.04 

0.04 

2.03 

0.23 

0.e3 

0.03 

0.23 

0.02 

0.02 

0.02 

0.01 

0.01 



32,473,177 TOTAL 



NM 
NM 
NM 
N 
N 
NM 
NM 
NM 
NM 
NM 
NM 
NM 
NM 
NM 
NM 
N 



57. 
53. 
59! 
60. 
61. 
62. 
53. 
54. 
65. 
66. 
67. 
58. 
59 , 

70! 
71. 
72. 



F-7 



APPENDIX G ^ ^ ll_- 



COMMENTS TO THE LEGISLATIVE RESEARCH COMMISSION 

ON THE 

STUDY OF THE REGULATION AND TAXATION OF 

BANKS, SAVINGS & LOAN ASSOCIATIONS, AND CREDIT UNIONS 

JANUARY 12, 1984 



Chairmen Edwards and Warren, Members of the Commission: 

Gentlemen, thank you for inviting me to appear before you today. 
As Administrator of Credit Unions, I will try tc provide you some 
information about state chartered credit unions as it might relate 
to the questions of taxation and regulation. 

I believe, however. Secretary Hope (Secretary of Commerce, C. C. 
Hope) has just provided you with the Commerce Department's thoughts 
and comments in regard to the specific areas on which I was asked 
to make comments. Therefore, I will not take up your time to 
repeat them. His comments and the information he gave you should 
provide some comparisons between the three regulatory agencies. 

I was asked, however, to outline the history and jurisdiction of 
the Credit Union Commission. Before I do, I would like to give 
you a few facts about our Division and the number , size , and types 
of state-chartered credit unions we regulate. 

THE DIVISION 

The Credit Union Division is a Special Fund agency and our operation 



G-1 



is supported entirely by supervisory and examination fees paid by ^ 
the state credit unions. Absolutely no General Fund monies are ^| 
involved in our budget. But since the funds are invested by the 
State Treasurer, the General Fund does receive the interest earned 
on our cash balances. Our 1983-84 budget is $526,856. Although 
we have 13 budgeted positions, we have operated the last three 
years with 11 filled positions — Administrator, Deputy, seven 
Examiners and two administrative-clerical positions. 

During the reorganization of state government in 1971, the Credit 

Union Division was transferred from the N. C. Department of 

Agriculture to the Commerce Department as a type II transfer. 

The Administrator and the division exercises all of their prescribed 

statutory powers independent of the Secretary of Commerce, but 

the general administration and management functions are performed V 

under the direction and supervision of the Secretary. 

NUMBER AND SIZE OF CREDIT UNIONS 

Presently there are 202 state chartered credit unions and 125 

federal credit unions located in North Carolina. As of December, 

1982, total assets of state chartered credit unions were just 

over $1 billion or $1,054,000,000, compared to assets of approximately 

$550,000,000 for the federal credit unions. 

Less than one-tenth of the population or approximately 530,000 

people are members of the 202 credit unions. It is estimated that 

over one-third of the federal and state chartered credit unions 

have less than one full-time employee; and there are approximately M 



there are various state-wide religious association credit unions, 
church credit unions, and credit unions for handicapped groups such 
as an association of all blind people in North Carolina. There are 
.i|>|ii oxiiiijt.i> ly IwctWy i uiiii-comniuru t y lyi>(' cjodil union;'.. 

CREDIT UNION COMMISSION 

In regard to the history and jurisdiction of the Credit Union 
Commission, it was established in 1971 and had its first meeting 
in 1972. It is made up of seven members appointed by the Governor; 
four from the public sector and three from the credit union industry. 

The Commission usually meets three times each year. During the 
last five years, the average Commission cost per fiscal year has 
been approximately $1,550.00. 

Since 1971, the Commission has functioned primarily in a review 
and advisory capacity. Although the Administrator has statutory 
powers to issue various rules and regulations, the Commission is 
vested with full power and authority to review, approve, or modify 
any action taken by the Administrator of Credit Unions in the 
exercise of all powers, duties, and functions vested by law and 
exercised by the Administrator under the credit union laws of the 
state. 

Therefore, since they have review power, most rules are adopted 
during a public hearing and in conjunction with a Commission meeting 
so that the Administrator has the opportunity to receive the 



G-3 



5,000 non-compensated, volunteer credit union directors and officials. 

Some 1982 data from the National Credit Union Administration (NCUA) 
indicates that for all of our state chartered credit unions, the 
average savings per member in our 202 credit unions is approximately 
$1,910.00 and the average loans outstanding per member is $2,192.00, 
This illustrates that the vast majority of the credit union loans 
are the small consumer-type. There are other statistics which 
indicate that out of the total savings on deposit in all the 
financial institutions in North Carolina, the savings on deposit 
in the 327 credit unions make up about 4-5% of the total. 

So in terms of total assets, percent of total deposits, average 
size of a member's savings account, and average amount of a member's 
loans outstanding, these figures for credit unions would probably 
appear relatively small when compared with those of the other 
financial institutions. 

TYPES OF CREDIT UNIONS 



There are about as many different types of credit unions as there 
are credit unions (202) . These are primarily occupational or 
employer types, or associational , residential or community types. 
In the employer type, there are credit unions made up of employees 
of governmental units (state and local) ; employees of the postal 
service; newspaper companies; textile and manufacturing companies; 
farm, meat, dairy business; insurance companies; public utilities; 
hospitals; paper and tobacco companies; etc. Under associational. 



Commission's advice and concurrence. There are a few rules 
which can ^lot be adopted without the advice and consent of 
the Commission. 

The Commission has provided a needed link between the Credit 
Unions and the Administrator and vice versa. 

This concludes my remarks. Thank you for inviting me to iippear. 
The Credit Union Division and the Commission will be glad to 
provide you with any information which we ha\e, or which we dire 
abiia to provide. 



G-5 



APPENDIX H 






COMMENTS TO THE LEGISLATIVE RESEARCH COMMISSION 

ON THE 

STUDY OF THE REGULATION AND TAXATION OF 

BANKS, SAVINGS & LOAN ASSOCIATIONS, AND CREDIT UNIONS 

JANUARY 12, 1984 

Chairmen Edwards and Warren, Members of the Commission: 

I appreciate the invitation to appear before you today. 
Secretary Hope has covered several of the specific areas that I 
was asked to make comments about and I see no reason to restate 
them. 

The Savings and Loan Division regulates a total of 82 state 
chartered savings and loans with total assets of about $5.5 
billion. One year ago, we had 90 state chartered associations 
with combined assets of just over $5 billion. To give you more 
perspective, 7 years ago there were 138 state chartered 
institutions with $4.8 billion in assets. At the end of 1979, the 
number increased to 157, with $6.5 billion in assets. Industry 
consolidation has brought us back to our present number of 82. 

At year end 1983, there were 68 ftderally chartered savings 
and loans located in North Carolina representing combined assets 
of just over $9.3 billion. This compares with 48 associations and 
total assets of $4.9 billion at the end of 1979. 

The Savings and Loan Division is a special fund agency and 
our operation is supported by supervisory and examination fees 
plus various application fees paid by the state chartered 
associations. No general fund monies are involved in our budget. 



H-1 



Our 1983-84 budget is $761,181. I am appointed by the Seccetacy 
of Commerce and sprve at his pleasure. Our staff consists of a 
Deputy Administrator, Chief Examiner, nine Field Examiners, Legal 
Specialist, Administrative secretary, and Clerk Typist. Our main 
statutory duty is the protection of the investing public by 
assuring the safety and soundness of the state chartered 
associations. 

The Division was placed in the Department of Commerce as a 
Type II Transfer in the reorganization of state government that 
took place in the early 1970 's. The Division exercises all of its 
prescribed statutory powers independent of the head of the 
Department of Commerce, except that managem^int functions are 
performed under the direction and sui srvision of the Secretary of 
Conmerce. 

The Savings and Loan Commission is composed of seven memberfj 
appointed by the Governor to four year staggered terms. A 
majority of the members must be public members and cit J east two 
members must be active managing officers of stats chartered 
associations. The Commission may review, approve, disapprove, or 
modify any action taken by the Administrator. Quarterly meetings 
are required for the Savings and Loan Commission, 

The changes that have and are continuing tc taKe place 
throughout the financial industry have been responded to by the 
Division and the General Assembly. The General Assembly , approved 
a complete recodification of the statutes regulatirui yLale 
chartered associations in the 1981 session. Significant changes 
and additions to the new statutes were made by the General 
Assembly both in the short session of 1982 and the session just 
completed. These modifications were necessary in order to keep 



3 - 



pace with the rapidly developing new approaches in the financial 
institution regulatory environment. 

The statutory changes I have briefly mentioned have allowed 
the state chartered savings and loans the additional flexibility 
and powers to enable them to better meet the competitive forces in 
the marketplace. The associations are nfi#e able to serve their 
market and can offer a wider range of services than was possible 
three years ago. In spite of all this, we continue to see today 
a savings and loan industry that is still predominantly gearing 
its investments and business to real estate lending . A number of 
our associations are being innovative in their approaches to real 
estate lending and as a result, are better able to meet the 
public's needs in this very important area. 

I think we will continue to see the savings and loan industry 
in a consolidation and growth posture that has been prevalent for 
the last two years. Although our final statistical information is 
not complete for 1983, we have had eight mergers take place during 
the year and the real deposit growth just for state chartered 
associations will be in the $500 to $600 million range. We 
anticipate that the new charter activity will begin to show life 
after several years of being dormant. W3 do not, however, expect 
the level of new charter application activity we experienced in 
the 1978-1980 time period. 

Again, I thank you for your invitation to appear here today. 
We will be glad to provide whatever information you would want and 
are capable of providing. 



H-3 



APPENDIX I 



RIMARKS OF JOHN R. JORDAN, JR., LEGISLATIVE COUNSEL NORTH CAROLINA BANKERS 
ASSOCIATION, TO A MEETING OF THE LEGISLATIVE RESEARCH CCWUSSION STUDY 
CCtWITTEE ON THE RBGULATICN AND TAXATION CF BANKS AND OTHER FINANCIAL 

iNSTnuriONS 



Senator Edwards, Representative Warren, distinguished itenters of the Study 
Cottftdssion. I appreciate the opportunity to speak a brief word on behalf of the 
North Carolina Bankers Association. First, let me say that it is the position 
of the banking industry of North Carolina that the structvire of providing 
financial services to the people of North Carolina is sound. Indeed, as to the 
portion of the structure relating to banks, I can tell you that the banking 
system of North Carolina is the envy of many other jurisdictions to which my 
practice takes me. 

Nevertheless, we deem it appropriate that you further concern yourselves 
with the topics set out in your notice of 16 December 1983. They are: 

(1) whether there should be a single state regulatory agency to 
regulate and supervise all financial institutions in North 
Carolina; 

(2) whether there are state statutory and regulatory provisions 
resulting in inequitable treatment of different types of 
financial institutions and whether the provisions ought to be 
changed; and 

(3) whether there are inequities in the state taxation of different 
types of financial institutions, and to indicate specifically how 
these inequities should be remedied. 

As is known to most in this roan, these are areas of interest vduch have 
already received much study in the past. Nevertheless, we welcome the 
opportunity to assist you in every way as you begin further consideration of 
them. 



I-l 



First, as .^ - :- concept of a single state regulatory agency. The North 
Carolina Bankers Association has not taken a specific position on this issue at 
this tims. S have asked me to express my personal opinicn on the 

single regulatory agency' concept and I am glad to do so. I wculd offer a word 
of cautio" "' '-^^^ ..o^^^.io^ hour. Banking tluroughout the nation is in a 
transitic _ seen the sweeping changes which have taken place 

within the last few years. Even others lie immediately ahead. Therefore, it is 



ity view that we should 
regulator^' o;-,-,,,--^,- r- 
will able 
decision might take. 

As to the second a: 



Txit a while before changing the existing 
Lna. Nevertheless, you may be sure that we 
aneral Assentoly regardless of what form that 



ems set out m your notice, T will address 
them together. The taxat^^.. ^^ ^^.ancial institutions has been undergoing study 
and change continuously for scms 13 years now beginning with the legislative 
session of 1369 . 



w 
m 



^^ 




triie as to savings ana 



Ls is particularly 
jiations who sought and obtained from this 



I- 2 



General Assenbly the right to pay incxme taxes on the basis of a business 
cx)rporation. In this particular light exenption fran Intangibles Tax of savings 
accounts in savings cind loan associations becomes glaringly inequitable. 

You have been very patient here today in hearing out a series of speakers. 
I will not iitpose upon your time further. I have, as evidence of our good faith 
and our desire to cooperate with you fully the NCBA has created a special task 
force which has been assigned to this Study Committee. The menibers of this task 
force stand ready to provide you with any information you require of us to 
assist you in every way possible. I would like to introduce them at this time 
as all four members of the task force are present. They are: 

Mr. Joseph Sandlin, of Southern National aank 

Mr. Larry Hazeltine, of NCNB National Bank 

Mr. Thanas Sanders, of Wachovia National Bank 

Mr. Jim Early, of First Union National Bank 
New, Mr. Chairman, I again thank you for your courtesy and stand ready to 
respond to any questions I can answer. 



I- 3 



APPENDIX J 

Presentation on Behalf of the 

NORTH CAROLINA LEAGUE OF SAVINGS INSTITUTIONS 

by 

Gordon P. Allen, Legislative Agent 

January 12, 1984 



Chairmen Edwards and Warren, Members of the Committee: 

My name is Gordon Allen and I serve as Legislative Agent for the 
North Carolina League of Savings Institutions. We appreciate the opportunity 
to appear before you today to respond to the questions asked by your staff 
and to make suggestions as to those issues which the League feels merit 
consideration by this Committee. 

If I may spend a moment to share with you some recent history con- 
cerning regulation and taxation of savings and loans, I will be better able 
to address your specific questions. During the 1981 Session of the North 
Carolina General Assembly, two major pieces of legislation were passed 
which will have a dramatic impact on our industry in the years ahead. 
First, the entire body of law governing the organization and operation of 
state chartered savings and loan associations was rewritten. The result of 
a year long study ably guided by Senator Edwards and former Representative 
Ruth Cook, this rewrite accomplished a change in philosophy in the regulation 
and supervision of savings and loans. It considerably broadened the oper- 
ational latitude for S&L's while providing for regulators the tools necessary 
to assure that any new powers were exerci<^3d in a manner designed to 
preserve the safety and soundness of the institution and thus protect the 
funds of the depositors. The second piece of legislation revised the method 
of taxation of S&L's to one which parallels that applicable to business corpo- 
rations generally in North Carolina. These two acts were ratified within an 
economic environment of excessively high interest rates which saw virtually 
the entire savings and loan industry losing substantial sums of money. 
That state of economy made clear the need to permit S&L's sufficient diversity 
of investments to remain viable throughout any economic cycles. It also 



J-1 



underscored the unfairness of the then current system of taxation which, 
because it was not tied to income, became confiscatory in nature as taxes 
remained high while the taxpaying S&L's were losing money. 

Over the past several years, the laws and regulations governing the 
organization and operation of federally chartered S&L's have also been 
greatly modified, primarily by two Congressional Acts: the Depository 
Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St 
Germain Depository Institution Amendments of 1982. As the 1981 state law 
did for state chartered savings and loans these two acts broadened consider- 
ably the investment authority of federal S&L's. They also deregulated 
completely, for all practical purposes, the rates which financial institutions 
could pay for savings deposits. As with the state law changes, the primary 
impetus behind the federal enactments was the need to assure that federal 
S&L's had sufficient investment flexibility to assure that they would be 
viable even during severe economic cycles of high interest rates. 

One comment is in order regarding what was not accomplished by these 
changes in state and federal law. Savings and loans were not magically 
converted to banks. The major component of our industry's investment 
portfolios continues to be residential mortgages. More importantly, despite 
the breadth of new investment authorities, S&L's in North Carolina continue 
to invest the vast majority of new deposits in residential mortgages. The 
role our industry was created to fulfill has not changed at all. The new 
powers were intended, and have been used, and will continue to be used, 
to assure our ability to remain the primary provider of home mortgage 
financing. 

With this background in mind, we can turn to the specific questions 
posed in the Committee's letter requesting our appearance today. 

(1) Should there be a single state regulatory agency to regulate and 
supervise ail financial institutions in North Carolina? 

We believe the current regulatory structure to be adequate and efficient. 
There are substantial functional and structural differences among banks, 



J- 2 



savings and loans, and credit unions. Properly so, as these different 
types of institutions pUiy different roles in our state's economy. Ihis is 
not to suggest that there is no overlap in those roles. That overlap, 
however, serves only to create healthy competition which inures to the 
benefit of the consuming public. This competitive overlap should not obscure 
the fundamental differences which define the different types of financial 
institutions and which warrant separate regulators. If an effort were made 
to consolidate the regulatory function; we believe it would then become 
necessary to establish separate divisions within that new agency to deal 
with each type of institution. We would, in effect, be right where we are 
now, with three separate agencies in a single departmnt. 

The savings and loan industry has just emerged, is still emerging, 
from the most devastating period in its history. During that period, the 
Savings and Loan Division was extremely effective in dealing with any 
potential problems before they became critical. Other financial institutions 
were impacted differently by the high interest rates which caused so much 
trouble for our industry. There is no reason to believe that a single 
agency could have responded better, or indeed as well, to the traumas of 
the past few years. The North Carolina League of Savings Institutions 
opposes consolidation of the state's financial regulators. 

(2) Are there state statutory and regulatory provisions resulting in 
inequitable treatment of different types of financial institutiorts 
and should such provisions be changed? 

As noted above, the statutes governing regulation and taxation of 
savings and loans were substantially rewritten in 1981, with the tax changes 
effective in 1982. Our industry's lack of experience with these new laws 
makes it very difficult to judge the existence of inequities which might 
warrant the consideration of this Committee. As a general matter, however, 
the General Assembly has traditionally treated financial institutions differently 
when, in that body's collective opinion, the different roles played by the 
various types of financial institutions made such different treatment appro- 
priate. This Committee may wish to consider whether or not such a functional 
approach retains its basic fairness. If not, the approach should be changed. 



J- 3 



If it is still fair, differences in treatment should continue to be assessed 
with respect to the different functions performed by financial institutions. 

(3) Are there inequities in the state taxation of different types of 
financial institutions, and how specifically should these inequities 
be remedied? 

Our comments to the second question are equally applicable here. 
Certainly, differences in taxation exist. Whether such differences are 
inequitable, however, can only be determined by the General Assembly in 
light of the reasons which may exist for perpetuating those differences. 

Once again I would like to thank the members of the Committee for 

inviting us to appear today. With me is Paul Stock, Executive Vice President 

and Counsel for the League. Paul and I would be happy to try to answer 
any questions you might wish to ask. 



J- 4 



LEGISLATIVE RESEARCH COMMISSION 

COMMITTEE ON THE TAXATION AND REGULATION 

OF BANKS, SAVINGS AND LOAN ASSOCIATIONS 

AND CREDIT UNIONS 

Presentation of Mr. Gordon P. Allen 

North Carolina League of Savings Institutions 

November 9, 1984 



J-B 



Mr. Chairman and Members of the Committee: 

On behalf of the North Carolina League of Savings Institutions, thank you 

for the opportunity to appear before you today and for the considerable amount 

of diligent effort you have already devoted to fulfilling the charge given you 
by the General Assembly. 

In his letter to us, Mr. Sullivan stated that this Committee had chosen to 
"turn its attention once again to the issue of taxation of. . . financial 
institutions and their depositors." He requested that we present "our specific 
beliefs and their underlying reasons as to what inequities, if any, exist re- 
garding differing state tax treatment of the various types of financial insti- 
tutions. . ." He asked that we relate the burdens imposed by such inequities 
and any legislative recommendations for eliminating them. 

With respect to the general taxation of savings and loan associations by 
the state, as most of you know, the General Assembly rewrote Article 8D of G.S. 
Chapter 105 during the 1981 Session. Prior to that revision, S&L's paid a tax 
based on total deposits that was unrelated to the institutions' profitability or 
ability to pay. In support of our contention that such a method of taxation was 
unfair and could even prove to the confiscatory during periods when our members 
were losing money, we presented a study and analysis of the taxation of savings 
and loan associations prepared by the accounting firm of Peat, Marwick, Mitchell 
& Co. The 1981 revision was intended by the General Assembly to result in a 
method of taxation comparable to that imposed on other businesses in North 
Carolina. When we received this Committee's request to appear today, we asked 
Peat Marwick to analyze the current state tax structure for S&Ls to see if that 
legislative intent has been realized. The results of their analysis are attached 
to the copies of our written presentation which have been distributed to the 
members of the Committee. Without taking time to review their entire report, 
let me just say that the revisions appear to be working as intended. 

In turning next to briefly address the Committee's question about inequi- 
ties in the taxation of financial instiutions and their depositors, please allow 
me to restate some of the points made by the League when you first discussed 
these same issues. Differences in treatment of the various financial institu- 
tions are not rendered inquitable merely because they are not the same. Where 
those differences are founded on valid distinctions among the entities being 
taxed and are consistent with a valid goal or policy to be fostered, it would, 
in fact, be inequitable to treat those institutions alike. Credit unions pay 
no state taxes. This treatment is clearly a benefit our membership would like 
tc share. Credit unions, however, are afforded this benefit because they are 
seen as being different from other types of financial institutions in that 
they are not free to deal with the public generally, but are restricted to a 
membership sharing a common bond or community of interest. The services they 
can offer are limited to those which are consistent with that limited member- 
ship. The Congress of the United States and the North Carolina General Assembly 
have identified this "different" type of institution as deserving of "different" 
tax treatment. We would not presume to suggest that merely because this treat- 
ment is different, it is also inequitable. 

Contrary to a frequently expressed misconception, savings and loan associ- 
ations have not become commercial banks, nor will they. Some of the differences 
which previously distinguished these two types of entities have disappeared, it 
is true. Very fundamental differences, however, continue to exist. Foremost 



J-6 



among these differences is the continuing conunitment of the thrift industry to 
the financing of residential estate. Having witnessed the devastating impact of 
downturns in the real estate market coupled with high costs of deposits created 
by deregulation of savings accounts, both Congress and the General Assembly have 
moved to broaden the investment authority of savings and loans. This was not 
done to lure thrifts away from making home loans, but rather to provide suffi- 
cient tools to retain sufficient financial strength to continue to make home 
loans. These broadened powers have greatly increased the direct competition 
between banks and S&Ls for establishment of relationships with retail con- 
sumers. In marketing many of these services, like interest bearing checking 
accounts, thrifts have encouraged the blurring of the lines of distinction 
between themselves and commercial banks as a means of penetrating a market which 
has belonged exclusively to the banks in years past. 

But when you examine the other structural differences which have tradi- 
tionally distinguished banks from thrifts, little has changed despite all the 
deregulation which has taken place. The wholesale or commercial market is still 
the domain of the commercial banks. Commercial demand deposit authority, the 
cornerstone of the relationship between a bank and its business, as opposed to 
consumer, customers remains the exclusive province of the banks. The lending 
patterns of commercial banks do not have the home mortgage emphasis which con- 
tinues to characterize the savings and loan industry. If the importance of this 
distinction is unclear, let me point out that the difference in investment 
portfolios resulted during 1981, when interest rates were at unprecedented 
levels, in record earnings for the commercial banking industry and record losses 
for the savings and loan industry. Even at today's much lower levels, 1984 will 
probably be a break-even year for our industry in North Carolina. I do not 
know, but suspect, that the banking industry will fare somewhat better. 

If I might make one more brief point in closing. The last time you 
addressed this subject, a member of this Committee asked if S&Ls would remains 
S&Ls or if they would all become banks. To some extent, the answer to that 
question rests heavily on the actions taken by Committees such as yours and 
the entire General Assembly. If you continue to place a high priority on home 
finance; and if you adopt policies that foster and encourage that priority; S&Ls 
will continue to be home lending specialists. If policies are adopted that 
encourage a change in emphasis to more lucrative forms of investment, our 
industry may well be deprived of any choice in the matter. 

Although each type of financial institution is treated somewhat differently 
by the state, we believe these differences Lo be based on value judgments made 
by the General Assembly and can identify no inequities which we feel must be 
elminated. 



J-7 



TAXATION OF NORTH CAROLINA SAVINGS AND LOAN 
ASSOCIATIONS BY THE STATE OF NORTH CAROLINA 



Prepared for che 
North Carolina League of Savings Institutions 



by 



Peat, Marwick, Mitchell & Co. 
Raleigh, North Carolina 



J-8 



Taxation of North Carolina Savings and Loan 
Associations by the State of North Carolina 



The purpose of this report is to present an analysis of the taxation of 
North Carolina savings and loan associations by the State of North 
Carolina and to compare this tax structure with that of other North 
Carolina business corporations. This study also compares present law 
with prior law to illustrate that several prior inequities between 
savings and loan associations and general business corporations have 
been remedied. 

I. Applicability of Various State Taxes to Savings and Loan Associations 
and Other Business Corporations 

The following table lists the types of state taxes to which savings 
and loan associations and general business corporations are subject. 

Type of Tax 

Income 

Franchise 

Intangible personal property 

Sales and use 

Real property 

Tangible personal property 

This study will focus only on franchise, income and intangible 
personal property taxes because the other taxes are comparable for 
savings and loan associations and general business corporations. 

II. Description of North Carolina Taxes 

A. Income Tax 

Under prior law, savings and loan associations and general business 
corporations were both taxed on net income. The tax on savings and 
loan associations was called an excise tax. The rates assessed on 
net income were as follows: 

1. Savings and loan associations 7*2% 

2. General business corporations 6% 

As a result of a previous study of North Carolina taxation of savings 
and loan associations, the law was changed effective for taxable 
years beginning on or after January 1, 1982 so that savings and 
loan associations are now subject to the income tax at the same 
6% rate as general business corporations. 



J-9 



The major difference in the determination of net income for savings and 
loan associations and general business corporations is the computation 
of the bad debt deduction. Savings and loan associations are entitled 
to partial relief from federal income tax by use of a bad debt deduction 
computed by statutory formula. Because North Carolina taxable income is 
computed by starting with federal taxable income and making certain 
adjustmants thereto, this bad dabc deduction also reduces North Carolina 
taxable Income. Savings and loan associations are entitled to a bad 
debt deduction computed under one of three methods. The percentage-of- 
eligible-loans method allows a deduction for the amount required to 
raise the loan loss reserve to 0.6% of eligible loans. A second method 
allows savings and loan associations to write-off the actual losses 
incurred during the year with respect to these loans. Alternatively, a 
savings and loan association may claim a bad debt deduction equal to 40% 
of its taxable income. 

Under the Tax Equity and Fiscal Responsibility Act of 1982, the bad debt 
deduction computed, under the percentage-of -eligible- loans method or the 
percentage-of-taxable-income method must be reduced by 15% of the amount 
by which the deduction exceeds actual losses incurred, effective for 
taxable years beginning after 1982. The Tax Reform Act of 198A increased 
the cutback in the deduction to 20% effective for taxable years beginning 
after 1984. 

B. Franchise Tax 

The franchise tax is computed at the rate of $1.50 per $1,000 of taxable 
value and is now assessed against all corporations other than exempt 
organizations. It is assessed on the highest of the following three 
values: 

1. Total of capital stock, surplus and undivided profits 
(net worth) ; 

2. Investment (generally book value) in tangible property, 
real and personal, located in North Carolina; 

3. Total assessed value of all property located in North 
Carolina including the net value of all property subject 
to North Carolina intangible tax. 

Both savings and loan associations and general business corporations are 
now subject to the franchise tax. Under prior law, savings and loan 
associations were liable for the share and deposit tax rather than the 
franchise tax. 

The old share and deposit tax (known as the capital stock tax prior to a 
1979 law change) was assessed against savings and loan associations at 
the rate of $.75 per $1,000 of the aggregate amount of savings deposits 
held by such associations. This tax was similar to the franchise tax 
assessed against general business corporations, in that it is a tax for 
the privilege of doing business in North Carolina. However, the franchise 
tax is assessed either on asset value or net worth; the net worth base 
reflects the association's profitability because it includes undivided 
profits. The share and deposit tax was assessed on liabilities and did 



J-10 



not relate to the association's profitability. This tax was assessed on 
both stock associations, which are owned by shareholders, and on mutual 
associations in which the depositors are considered to be the corporate 
shareholders. Again, as a result of a previous study showing that the 
savings and loan industry paid a disproportionate share of taxes to the 
State of North Carolina, the law was changed effective December 31, 1982 
to make savings and loan associations liable for the franchise tax 
rather than the share and deposit tax. 

C. Intangible Personal Propency Tax 

This tax is assessed on the following classes of intangible property at 
the rate specified: 

Rate 

1. Money on deposit based upon the 
average of bank deposit balances 
at February 15, May 15, August 15, 

and November 15 $.10 per $100 

2. Money on hand at the end of the 

taxable year $.25 per $100 

3. Excess of accounts receivable over 
accounts payable at the end of the 

taxable year- $.25 per $100 

4. Excess of notes, bonds, mortgages 
and other written evidences of 
debt over similar types of debt 

payable $.25 per $100 

5. Shares of stock based upon market 

value at December 31 $.25 per $100 

Savings and loan associations are required to pay intangible tax 
on deposits in banks and money on hand. However, they are exempt 
from taxation on accounts receivable; notes, bonds, mortgages and other 
evidences of debt; and shares of stock. Also, customers of savings and 
loan associations do not have to pay intangible tax on their deposits in 
savings and loans. 



Conclusion 

According to a previous tax study. North Carolina savings and loan 
associations paid a disproportionate share of state taxes under prior 
law. However, savings and loan associations are currently taxed by the 
State of North Carolina in basically the same manner as general business 
corporations, with the exceptions noted above. 



J-11 



APPENDIX K 
Gentlemen : 

It is a pleasure to appear before you and to state the 
position for the credit unions in North Carolina in connection 
with your consideration of the question of regulatory and 
taxation provisions as they apply to commercial banks, savings 
and loan associations and credit unions. 

We are, and have been, well aware of the 1981-82 annual 
report of the State Treasurer and his premise for his recommen- 
dations and agree that during the past several years there have 
been many changes of great magnitude in the commercial banking 
business and the savings and loan industry. While he may be 
right in his conclusion that in the eyes of the public, these two 
types of institutions are all financial institutions offering 
similar or identifiable services, the hard fact is that credit 
unions are neither commercial banks nor savings and loans. The 
historical distinction between commercial banking business, the 
savings and loan industry on the one hand, and credit unions on 
the other, has not, as a practical matter, disappeared and we are 
here Concerned primarily with retaining the uniqueness of the 
credit unions in North Carolina and preserving the ability of 
these institutions to effectively carry out the purposes for 
which they were organized. 



K-1 



The Treasurer suggested Chat the regulatory process 
should be made uniform and standardized if these institutions 
(including credit unions) are to compete fairly and equitably. 
Historically, these financial institutions have not been 
homogenized and, in our opinion, and especially for the survival 
of credit unions, they should not be homogenized into a single 
group. 

We oppose any change in the present regulatory and tax 
provisions as they relate to credit unions and don't wish to be 
involved in problems that may or may not exist in connection with 
the commercial banking or the building and loan industries. We 
do wish, however, to point out that there has been no basic 
change in philosophy or structure or, if you please, the 
uniqueness of the credit union and its role as a financial 
institution . 

IVhat is a credit union? A credit union might best be 

defined as groups of people within identifiable boundaries who 

save their money together and make low cost loans to each other 

from the accumulated funds. G.S. §54-109.1 defines a credit 

union and states the purposes of a credit union as follows: • 

"A credit union is a cooperative, non- 
profit association incorporated under 
Articles 14(a) to 14(1) of this Chapter 
for the purposes of encouraging thrift 
among its members, creating a source of 
credit at a fair and reasonable rate of 
interest and providing an opportunity 
for its members to use and control their 
own money in order to improve their 
economic and social condition." 



K-2- 



The credit union was born out of a real need of people 
of average means - many of them wage earners, employee groups, 
and some of them community groups, mostly minority groups - to 
obtain credit for consumer goods, a void that existed in the 
early days and which, without credit unions, would exist today. 
People saving their money together and helping each other - a 
truly cooperative effort. As time has passed, this objective has 
not changed and the credit union philosophy is the same today. 
As you will see, these groups are not in the public domain making 
commercial loans, they have and still remain a source of consumer 
credit for their members and in addition to providing this 
consumer credit, credit unions encourage systematic thrift and 
educate members and their families in the prudent management of 
their own money. 

In North Carolina we have 327 credit unions. 202 or 
61.87o of these are State chartered, and 125 or 38. 2% are 
Federally chartered. More than 165 or 50.51 of these credit 
unions have less than $500,000 in assets. Over one-third of the 
credit unions have less than one full-time employee and there are 
approximately 5,000 volunteers, non-compensated, who provide the 
services of the credit unions to members. 

How is the credit union unique? Unlike any other 
financial institution today, the credit unions do not serve the 
general public. They are limited to accepting savings and making 



K-3- 



loans to those who are within the credit union's defined field of 
membership. They are mutual, non-profit organizations whose 
activities are confined to its members. No one may obtain a loan 
or other benefit unless he falls within the defined field of 
membership and has savings in the credit union. The members own 
and control the credit union and they share in its distribution 
of earnings as well as in the retained reserves in the event of 
dissolution. Each member, unlike in ordinary stock corporations, 
has one vote regardless of the number or size of his accounts. 
All income after expenses and required reserves ultimately is 
returned to the members in the form of dividends. These divi- 
dends are fully taxable as interest and there are no exemptions 
or exclusions such as the exclusion allowed by stock dividends 
under the Internal Revenue Code. 

The non-tax status insofar as income tax is concerned 
is well established by the Federal government and has been well 
reasoned and supported by the State governments. 

In this presentation to you the Committee to study the 
regulation and taxation of these three separate and distinct 
types of institutions, I would like to point out in outline form 
the following: 



K-4- 



UNIQUENESS OF CREDIT UNIONS 

Credit Unions are non-profit, member-owned cooperative 
financial institutions. Membership is limited to persons within 
a well-defined field of membership -- general employment, assoc- 
iation, or geographic in nature. Credit unions are democratically 
controlled with each individual member of the credit union having 
one vote, regardless of the number of accounts or of dollars on 
deposit at the credit union. As democratically controlled 
financial cooperatives, the consumer orientation of these 
institutions is insured. These unique financial institutions 
return to their owner -members every penny of money earned in 
excess of operating expenses and required reserves. 

STATUTORY FRAMEWORK 

The North Carolina Credit Union Act and the Federal 
Credit Union Act establish a statutory framework that ensures the 
unique character of credit unions. The key features common to 
credit union statutes include: 

1. A well defined field of membership. 

2. Volunteer leadership. 

3. Democratic control with each member having one vote 
regardless of the number of dollars they have 
deposited with the credit union. 



K-5- 



4. Non profit status and no capital stock. 

5. Statutory reserves. 

6. Exemption from federal and state income taxation. 
During the past half century, the fundamental purposes, 

goals and objectives of credit unions have remained unchanged. 

INCOME TAX 

Under the present law, credit unions, both federally 
and state chartered, are and have been exempt from federal income 
tax since 1917 as result of a ruling of the Attorney General and 
later by specific statutory provisions and North Carolina 
likewise has exempted credit unions from corporate income tax, 

OTHER TAXES 

G.S. §105-122 is not applied to credit unions because 
they do not have any capital stock. Intangible taxes paid by the 
institution under G.S. §105-199 is not collected from credit 
unions because the credit union itself has no ownership interest 
in money on hand. As to the exemption from the other intangible 
taxes, accounts receivable, notes receivable, shares of stock, 
under G.S. §§105-201, 202 and 203, respectively, this is valid 
because a credit union obtains money from its members to lend to 
its members and it makes these loans, mostly small consumer loans 
only to its members. With respect to intangibles tax paid by 



K-6- 



depositors, this exemption was a concession made when the 
administration or regulation of credit unions was made self 
sufficient and supported solely by fees from credit unions. More 
than two-thirds of the credit unions, both state and federally 
chartered, do not have automated data processing and maintain all 
of their record keeping manually. The cost of handling such an 
item would be prohibitive. 

If we go to a system which would assess some taxes 
against our state chartered credit unions, and not against 
federally chartered credit unions, we would soon have no more 
state chartered credit unions as all would immediately convert to 
federally chartered credit unions. On the other hand, if it is a 
question of imposing these additional taxes on credit unions so 
as to weaken the position of these institutions, then we can 
assume that we would eventually do away with the majority of the 
credit unions in existence in North Carolina today. 

The license tax provisions of G.S. §105-102.3 is a 
special provision applying only to banks or banking institutions 
and was worked out in an overall scheme of taxation applying 
uniquely to commercial banks. 

State chartered credit unions do pay all sales and use 
taxes and all ad valorem taxes. 



K-7- 



CHARACTERISTICS OF CREDIT UNIONS 

FIELD OF MEMBERSHIP 

Credit unions are not open to the general public. In 
North Carolina 8A.5% of the state chartered credit unions are 
occupational or governmental onployee related (64.5% or 129 
credit unions have occupational fields of membership; 20% or 40 
credit unions are made up of governmental employees, federal, 
state or local fields of membership). Of the total credit 
unions, federally and state chartered in North Carolina, 67.9% or 
220 credit unions are occupational fields; 17.3% or 56 credit 
unions are government employee fields (either federal, state or 
local). The remaining are limited to associations or community 
groups. It is easy to see that the vast majority of credit 
unions are perceived to be an employee benefit supported by the 
employer . 

Credit unions continue to rely on member savings to 
generate funds for loans. Nationally, credit union membership 
has grown from approximately 5 million in 1951 to now more than 
47 million individuals. However, despite this growth the 
percentage of deposits in credit unions in relation to those of 
all financial institutions has remained about 4% in the last 
decade. Response to changing economic conditions and the use of 
new technology have not altered the uniqueness of credit unions 
either in structure or basic savings and lending services. 



K-8. 



VOLUNTEERS 

North Carolina and federally chartered credit unions 
rely heavily on the use of volunteers to run credit unions. By 
statute board members and committee members may not be 
compensated for their service as such. As stated earlier, in 
North Carolina, over one-third of the credit unions have less 
than one full-time employee. We have already referred to the 
democratic control and mutual ownership not for profit but for 
service philosophy to its members posture of credit unions. And 
while there have been changing member needs from the original low 
cost consumer loans to, in some cases, share draft accounts and 
mortgage loans available, this has been done without changing the 
structure or philosophy of the credit unions (the opportunity of 
its members to use and control their own money). Credit unions 
have not become banks, lending is still restricted to its members 
and while credit unions are authorized a fairly broad range of 
consumer lending powers, credit unions offer only those loan 
services sought by their members . Only a small percentage of 
credit unions engage in mortgage lending and only 14 of the 202 
North Carolina State chartered credit unions offer share draft 
accounts. Clearly, credit unions today remain a reflection of 
their members' wishes. 



K-9- 



REGULATION 

A dual chartering system of credit unions has worked 
well in North Carolina; sixty-one point seven (61.77o) percent of 
the credit unions operating in North Carolina are state 
chartered. Our credit union division, a part of the Department of 
Commerce, headed by a competent administrator, has done a good 
job in assuring the survival of the credit unions in North 
Carolina and has done a lot to preserve the very valuable 
services rendered to the members of the credit unions. The 
Credit Union Commission, which is vested with the power and 
authority to review, approve or modify actions of the 
administrator, is appointed by the Governor, whose administration 
is basically responsible for the overall policy as regards all 
financial Institutions and the Banking Commission, Savings and 
Loan Commission, as well as, the Banking Commissioner and the 
Savings and Loan Administrator, are all under the Department of 
Commerce and responsible to the same administration. Credit 
unions are entirely different and unique-type institutions, large 
and small, and should remain so in order to preserve the valuable 
services rendered by the members to themselves through this 
unique opportunity. 

SUMMARY 

From the standpoint of credit unions, it is certainly 
true that this type financial institution has maintained a 



K-10- 



historical distinction between either the commercial banking 
business or the savings and loan industry. It has today retained 
that distinction and should not be homogenized into a group as 
suggested by the State Treasurer. The credit union offers very 
distinct services to its members and only its members and to 
place them under the same regulatory body as the other commercial 
financial institutions and to upset the balance that now exists 
would be to destroy the whole concept which has so well served 
the people of our State. 



K-U 



APPENDIX L .^?«^ '^''^^ ^-r^...t:^ 



*W'. 



'^ 



»tatc of ^'ortl] Carolina 



LEGISLATIVE OrriCE BUILDINC. 



_ , , CLYDE SMITH 

Di'ji;irfmi'nt uf tlir J^crrrtanj of JMate deput. sicreiahv of siAif 

» I ■ I '.',,• t , BRENOACCIMS 

Klllnjlll 27hll COI.POI.*T,ON..TTO»N|v 

THE CAPITOL F DANIEL BELL HI 

DEPUTY SECURITIES ADMINISTBATOR 

THADEURE Charles w moore 

SECRETARY OF STATE . DEPUTY UCC FILING OCFICEB 

JOHN L CHENEY JR 

DIRECTOR OF PUBLICATIONS 
LUDELLE R HATLEY 

NOTARIES PUBLIC DEPUTY 



M E M O R A 




TO: The Committee on Regulation and Taxation of Banks, Savings 
and Loans, and Credit Unions 

FROM: F. Daniel Bell, III 

Deputy Securities Adminis 

RE: Regulation of Money Market Funds 

DATE: March 15, 1984 

I. BACKGROUND 

Money market funds are defined in the NASAA glossary of 

securities terms as follows: 

"Also called a liquid asset or cash fund, it 
is a mutual fund whose primary objective is 
to make higher interest securities available 
to the average investor who wants immediate 
income and high investment safety. This is 
accomplished through the purchase of high 
yield money market instruments such as U.S. 
government securities, bank certificates of 
deposit and commercial paper." 



Inc . or 

"NASAA" is an association of the Securities Administrators of the 
fifty states, Canadian providences and territories, Mexico, Puerto 
Rico, and District of Columbia dedicated to the cause of investor 
protection 



L-1 



Money market funds, are a type of mutual fund (open-end, manage- 
ment investment companies) which invest in short-term money 
kTtarket instruments such as commercial paper, certificates of 
deposit and United States Government obligations. There are 
mutual funds designed for every sort of investment objective - 
mutual funds invested in common stocks, or invested in corporate 
bonds - in addition to money market funds. 

Mutual funds provide an economical way by which an investor 
of modest means cam obtain the same professional advice and 
diversification of investments as an institution or a wealthy 
individual. Mutual funds enable thouseinds of investors to 
pool their resources in a fund which invests in a large nvunber 
of securities under the supervision of a professional investment 
adviser. The shareholders of the fund are its owners and are 
entitled to all of its net income, which consists of the gross 
income generated by the fund's investments less operating 
expenses such as investment advisory, custodial and accounting 
fees. A fund is required to buy back (rede«n) a share whenever 
requested to do so by a shareholder. 
II. FEDERAL REGULATION OF MOWEY MARKET FUNDS 
A. Securities Act of 1933 ; 

Unlike other corporations, money xaarket funds and 
other mutual funds offer their shares to the public on 
a continuous basis. Therefore, fund shares must always 
be registered for sale with the Securities and Exchange 
Commission ("SEC") under the Securities Act of 1933. 
Consequently, a money market fund must provide potential 
investors with a current prospectus which makes detailed 
disclosures about the fund's management, its investment 
policies and objectives and its investment activities. 
These prospectuses are reviewed by the SEC staff to 



L -2- 



determine their adequacy and completeness. The Securitier. 
Act of 1933 also limits the types of advertisements which 
may be used by a money market fund. 

Under SEC rules, money market funds must include a 
yield quotation in their prospectuses, and this quotation 
must be computed by use of a standardized method in accord- 
ance with SEC rules. In order to provide comparability 
and uniformity in advertising, money market funds which 
advertise yield must also utilize this method in their 
advertisements. 
Securities and Exchange Act of 1934 ; 

The purchase and sale of money market fund shares, 
as with all securities, are subject to the anti-fraud 
provisions of the Securities and Exchange Act of 1934, 
most notably Rule lOb-5. Rule lOb-5 meikes it unlawful 
in connection with the purchase or sale of any security, 
for any person, directly or indirectly by the use of any 
means or instrumentality of interstate commerce, or of 
the mails, or of any facility of any national securities 
exchange : 

1. to employ any device, scheme, or artifice to 
defraud; 

2 . to make any untrue statement of a material fact 
or to omit to state a material fact necessary in 
order to make the statements made, in light of the 
circumstances under which they -"re made, not mis- 
leading; or 

3. to engage in any act, practice, or course of 
business which operates or would operate as a fraud 
or deceit upon any person. 

Investment Advisers Act of 1940 ; 

Investment advisers to money market funds must register 



L -3- 



with the SEC under the Investment Advisers Act of 1940. 

The Advisers Act prohibits advisers from engaging in 

various transactions which would constitute conflicts 

of interest, and requires them to maintain and preserve 

various books and records which are subject to SEC 

inspection. 

Investment Company Act of 1940 ; 

Moreover, the money market fund itself, unlike other 
corporations, must be registered with the SEC under the 
Investment Company Act of 1940. In addition to requiring 
periodic reports to shareholders and the SEC, the Invest- 
ment Company Act of 1940 contains numerous provisions 
designed to prevent self-dealing and other conflicts of 
interests, to maintain the integrity of fund assets and 
to prevent the payment of excessive fees and charges by 
the fund and its shareholders. 

Among other requirements, the Investment Company Act 
of 1940: 

1. requires that at least 40% of a funds' directors be 
independent of its investment adviser; 

2. requires that the fund's investment advisory contract 
be approved by a majority of these independent direc- 
tors; 

3. sets forth broad provisions prohibiting transactions 
between the fund and its investment adviser or any 
"affiliated" person; 

4. provides for judicial remedies with respect to the 
level of compensation received from the fund and its 
shareholders by fund affiliates; 

5. prohibits a fund from deviating from its fundamental 
investment policies without shareholder approval; 



L -4- 



6. requires the bonding of fund officers and employees; 

7. requires that fund shares be valued daily to assure 
a fair price for both sales and redemptions; and 

8. authorizes the SEC to bring action against affiliated 
persons who have engaged or are about to engage in 

any act or practice constituting a "breach of fiduciary 
duty involving personal misconduct." 
The Investment Company Act of 1940 spells out requirements 
for the custodianship of mutual fund assets and pursuant 
to its rulemaking authority the SEC has adopted detailed 
regulations relating to the custodianship of such assets, 
which also are subject to periodic audit. The Act also 
contains provisions permitting criminal prosecution for 
any serious violation of that statute. 

Money market funds are also subject to SEC examina- 
tion and each money market fund has been inspected on at 
least three separate occasions since late 1979. These 
inspections focus upon compliance with specific require- 
ments of the federal securities laws summarized above. 
STATE REGULATION OF MONEY MARKET FUNDS 
A. Regulation of the Issuance : 

Chapter 78A of the North Carolina General Statutes, 
commonly referred to as the North Carolina Securities Act 
is based upon the Uniform Securities Act and was adopted 
April 13, 1974, effective April 1, 1975 replacing the 
predecessor Securities Act. The State of North Carolina 
has regulated the securities industry since the 1920 's. 

G.S. 78A-24 provides that it is unlawful for any per- 
son to offer or sell any security in North Carolina unless 



Data provided by the Investment Company Institute ("ICI") , a 
national association of the American mutual fund industry. 



L -5- 



the security is registered under Chapter 78A of the 
General Statutes or the security or transaction is exempt 
pursuant to G.S. 78A-16 or 78A-17. A money market fund 
unit or share is a security as defined in G.S. 78A-2(11) 
and due to the absence of an applicable exemption, regis- 
tration with the Securities Division, Department of the 
Secretary of State is required. 

The registration requirements are prescribed by G.S. 
78A-26 as coordinated process in conjunction with federal 
registration of the securities with the SEC pursuant to 
the Securities Act of 1933. The applicant is required to 
file with the Securities Division the following documents 
and information; along with a consent to service of process 
naming the Secretary of State as service agent: 

1. an application for registration of securitias; 

2. a copy of the latest prospectus filed under the 
Securities Act of 1933; 

3. a copy of any indenture or other instrument governing 
the issuance of the security; 

4. all future amendments; 

5. appropriate filing and registration fees; and 

6 . any other information or copies of any other documents 
filed under the Securities Act of 1933 as the Adminis- 
trator may request. 

Upon review of the documents and information submitted, 
the Administrator may issue a stop order denying effective- 
ness to, or suspending or revoking the effectiveness of 
any registration statement pursuant to G.S. 78A~29 if he 
finds that there are deficiencies or problems with the 
money market fund and that such an order is in the public 
interest. Circumstances giving rise to such an order include; 



L-6- 



1. The registration statement, or any amendments thereto, 
is incomplete in any material respect or contains any 
false or misleading statements; 

2. The person filing the registration statement, the 
issuer - including any partner, officer, director, 
or any person directly or indirectly controlling or 
controlled by the issuer - or any underwriter has 
willfully violated any provision of the Securities 
Act or any rule, order, or condition thereunder; 

3. The money market fund is the subject of an adminis- 
trative stop order or preliminary or permanent in- 
junction entered by any court of competent jursidic- 
tion under any State or federal act which applies 

to the offering; 

4. The money market fund's method of business includes 
any illegal activities; 

5. The offering has worked or tended to work a fraud 
upon purchasers; 

6. The offering has been or would be made with unreason- 
able amounts of underwriters' and sellers' discounts, 
commissions, or other compensation, or promoters' 
profits or participation; and 

7. The issuer failed to file any amendments to the 
prospectus. 

The securities laws of North Carolina also provide 
for regulation of advertising and contains antifraud pro- 
visions similar to the federal Rule lOb-5 minus the inter- 
state commerce requirement. Whenever it appears to the 
Administrator that any person has engaged or is about to 
engage in any act or practice in violation of the state 
securities laws, the Administrator may seek a court ordered 
injunction. The court may appoint a receiver or conservator 
for the defendant or the defendant's assets. The Adminis- 
trator is equipped with investigatory powers and may refer 
any willful violation of the securities laws to the 



appropriate district attorney for criminal prosecution. 
A willful violation is a felony punishable by fine up to 
$5,000 and/or imprisonment up to 5 years. Additionally, 
civil remedies are provided to any investor aggrieved 
due to the defendants violation of the Securities Act. 
Regulation of the Seller : 

A second level of investor protection is provided by 
G.S. 78A-2(2) and 18 NCAC 6.1305 in the requirement that 
all mutual funds, including money market funds, in excess 
of $500,000 or 100 purchasers be sold by a registered 
securities dealer other than the issuer. G.S. 78A-36{a) 
also requires that every applicant for a securities 
dealer license be registered with the SEC and that any 
person representing or proposing to represent a dealer in 
effecting transactions in securities be licensed as a 
securities salesman. G.S. 78A-39 provides the Adminis- 
trator a process of screening all dealer or salesman 
applicants by providing the ability to deny an applica- 
tion for certain reasons where denial is within the public 
interest. Also the Administrator may issue public censures 
or suspend or revoke, in whole or in part, a dealer or sales- 
man's license where certain violations have occurred and 
such action is within the public interest. 

Dealers are subject to both federal and state minimum 
net capital or bonding requirements, record keeping re- 
quirements, antifraud provisions, supervisory responsi- 
bilities, prohibitions against unethical or dishonest 
practices in the securities business; civil remedies and 
criminal sanctions. Salesmen applicants must pass federal 
and state examinations and are likewise subject to federal 
and state antifraud provisions, prohibitions against un- 
ethical or dishonest practices, civil remedies and criminal 
sanctions. 



L-8- 



Dealers and salesmen are federally regulated by the 
National Association of Securities Dealers, Inc. ("NASD"), 
a self regulatory organization chartered by the SEC in 
addition to regulation by the SEC. 
REVIEW OF MONEY MARKET FUI'JDS BY 1981 GENERAL ASSEMBLY 

On April 1, 1981, Senate Bill 353 entitled "An Act to 
Amend Chapter 53 of the General Statutes to Require that Money 
Market Investment Programs Offered By Persons Who Are Not 
Banks, Savings And Loan Associations, Industrial Banks or 
Credit Unions Shall Hereafter Be Regulated Under the State 
Banking Laws" was introduced by Senator Robert Jordan. The 
effect of the proposal would have been to bring money market 
funds under the definition of banks, subjecting them to all 
statutory provisions of Chapter 53 and the rules thereunder. 
The Secretary of State opposed the bill because, since such 
funds cannot qualify as a bank, the effect would have been to 
prohibit the sale of such funds to residents of this State 
thereby precluding North Carolina investors from seeking the 
higher yield provided by these funds. Further the Secretary 
of State asserted that the problems with these funds as perceived 
by competing financial institutions are best addressed by 
Congress as a national policy rather them a regional prohibi- 
tion. 

Senator Jordan subsequently offered a substitute Senate 
Joint Resolution to the Senate Banking Committee entitled "A 
Joint Resolution Memorializing Congress to Study the Expansion 
of the Jurisdiction of the Federal Reserve Board to Include 
Money Market Funds for the Purpose of Implementing National 
Economic and Monetary Policy". Although the resolution passed 
the Senate, its passage failed in the House. 



L -9- 



INCOMPATABILITY OF BAI^KING LAWS 

Investment companies are organized and structured pursuant 
to the Investment Company Act of 1940. Current State banking 
regulation is not designed for an entity of this nature. The 
imposition of Chapter 53 upon- investment companies offering 
money market funds would have the effect of eliminating such 
funds as an investment opportunity for North Carolina residents 
whereas the State's banking laws may be suitable for bank 
deposits which create a debtor-creditor relationship, they 
are inappropriate for money market funds offering equity 
shares. 

For example, G.S. §53-80, requires that a least three- 
quarters of the directors of a bank be residents of North 
Carolina. G.S. §53-2 requires that a bank have its principal 
office in North Carolina. Compliance with these provisions 
would be virtually impossible for nearly all funds. Similarly, 
G.S. §53-50 of the banking laws requires a bank to maintain 
reserves. The maintenance by money market funds of such non- 
interest bearing reserves would reduce the investment return 
to fund shareholders, not only in North Carolina but throughout 
the nation. In order to protect the rights of fund shareholders 
in the other 49 states, the funds would probably be forced to 
cease offering their shares in North Carolina. 

The North Carolina banking laws also contain a variety 
of restrictions on the capital structure of banks. In addition 
to the reserve requirements, shareholders must pay into a 
surplus fund 50% of the value of their common stock, and 
increases and decreases in capital stock require special 
approval of shareholders. These requirements are appropriate 
for banks because two groups of persons "invest" in a bank: 
one or more classes of shareholders who own the bank and share 
in its profits, and its depositors who are guaranteed a specific 
rate of return. Money market funds, on the other hand, under 
federal law may have only one class of investors, their share- 



L-10- 



holders, and the rights of all shareholders must be identical. 
The shareholders of a money market fund own 100% of the fund 
and under federal law are entitled to their proportionate 
share of a fund's assets and undistributed income when they 
redeem their shares. 

The primary thrust of both federal and state securities 
regulation is to provide full and fair disclosure to investors. 
Thus all prospective investors in money market funds must be 
provided with a prospectus, prepared and delivered pursuant to 
both federal and state securities laws, to provide adequate 
information upon which a potential investor may bass his or 
her investment decision. Federal and North Carolina banking 
laws do not impose similar disclosure requirements. 

In addition, under the Internal Revenue Code, money 
market funds must pay at least 90% of their income as dividends. 
G.S. §53-87 and G.S. §53-88 contain restrictions on the payment 
of dividends which are inconsistent with federal law. 
DISTINCTIONS BET^^ffiEN MONEY MARKET FUNDS AND BANK DEPOSITS 

A money market fund share is a share of common stock upon 
which dividends are declared only to the extent of the fund's 
net income which varies from time to time. The value of an 
investor's interest in a fund can also fluctuate as the value 
of the fund's portfolio rises or falls. On the other hand, 
a bank deposit creates a debtor-creditor relationship and 
represents a liability of the bank to the depositor, provid- 
ing a fixed rate of return in the form of interest, and deposit 
insurance up to specified amounts. 

Notwithstanding this fundamental distinction, many who 
have attempted to equate money market funds with bank deposits 
have focused on the so-called "check-writing" feature offered 
by the funds. Today money market mutual funds and other mutual 



L -11- 



funds offer investors expedited methods of redemption, thai 
is, methods by which an investor may obtain part or all of 
the current value of his investment in the fund. 

Because the customary mutual fund share redemption proce- 
dures can be cumbersome and time consuming, money market funds 
have devised methods of expedited share redemption. For 
example, many money market funds have entered into arrangements 
with banks whereby fund shareholders can write checks against 
their fund account. When an investor writes a check, the 
bank verifies that the customer's account is sufficient and 
obtains the funds from the account to cover the check. 

According to ICI, the check redemption system has been 
examined by several regulatory authorities, including the 
Comptroller of the Currency, the Assistant Attorney General 
of the U.S. Department of Justice, the General Counsel of the 
Federal Reserve Board, SEC Commissioners and Attorneys General 
in several states, who have unanimously concluded that check 
redemption procedures do not cause a money market fund to be 
engaged in the business of banking. 



LL-12 



,C^£ly^ <.^<U.C^ ^yi*.-^ c^^*i-X 



'/ 



ifrtHtr of ^\irtl| Carolina 

DrpartmrnJ nf tlii- S'l-rn-tari) of Jfrhitr 
Kalcinb 2 7 till 



l.EGlSLATIve OFFICE HulLDlNC. 



BRENOA E GIBBS 

CORPORATIONS ATTQ 

F DANIEL BELL III 
DEPUTY secuRiTies < 

CHARLES V» MOORE 

JOHN L CHENEY JR 
niRtCTOR OF PUBLIC 

LUDELLE R HATLEY 
NOTARIES PUBLIC DC 




MEMORANDUM 

TO: The Committee on Regulation and Taxation of Banks, 
Savings and Loans, and Credij^ Unions 

FROM: F, Daniel Bell, III 

Deputy Securities Admi: 

RE: Merrill Lynch Cash Management Account 

DATE: March 15, 1984 

I. INTRODUCTION; 

Although practically every major brokerage firm and 
many regional firms now offer a program similar to Merrill 
Lynch 's Cash Management Account ("CMA") , this memo will 
describe the structure and regulation of the CMA since this 
program was the first of its kind having originated in 1977 
and beccuse the CMA has served as the basic freimework for 
the establisliment of competing programs. The CMA is in 
actuality not an account but rather a service that links 
together several accounts. The component parts have been 
linked together by utilization of computer technology. The 
three components are as follows: 
II. SECURITIES ACCOUNT 
A. Description : 

The initial component, the securities account is a 
traditional brokerage account that allows a customer 
to buy securities on a fully paid or margin basis. Each 
customer's securities account is insured up to $500,000 
from the Securities Investors Protection Corporation 



L-13 



("SIPC") . Some brokerage firms secure additional 
insurance coverage. Purchase of securities on a margin 
basis is a means where the customer may leverage the 
account or purchase securities on credit. The brokerage 
firm will advance credit to the customer secured by the 
securities in the account. The credit limits are regu- 
lated by the Federal Reserve Board but generally amount 
to 50% of the value of the securities in the account. 
The interest rate on margin loans ranged from 11 1/4% 
to 12 3/4% for Merrill Lynch on August 2, 1983, for example. 
In other words for every present dollar of value in 
securities the customer may purchase another dollar of 
securities on credit or may receive fifty cents in cash. 
The end result is that no more than 50% of the securities 
account may be purchased on credit and that credit 
amount is secured by securities in the account. Should 
the value of the securities decline such that the extended 
credit exceeds 50%, the customer will receive a "margin 
call" for the deposit of additional funds. 
Regulation ; 

The extension of credit on margin is regulated by 
the Federal Reserve Board under Regulation T. The bro- 
kerage firm, the stockbroker, and the handling or main- 
tenance of the account is regulated by the Securities and 
Exchange Commission ("SSC") under the Securities Exchange 
Act of 1934; the National Association of Securities Dealers, 
Inc. ("NASD") a self regulatory associatioi of all bro- 
kerage firms, supervised and chartered by the SEC, the 
New York Stock Exchange and the Securities Division of 
the North Carolina Department of Secretary of State. 
Such federal and state regulation includes the licensing 
of brokerage firms and stockbrokers which may be suspended, 
revoked or restricted; record keeping requirements; 
minimum net capital or bonding requirements of brokerage 
firms; examination of stock brokers; prohibitions against 



-2- 



L-14 



unethical or unfair practices of both brokerage firms 
and stockbrokers; audits of brokerage firms; and anti- 
fraud provisions. Additional federal and state laws 
provide for censure, cease and desist orders, court 
ordered injunctions, receiverships, civil remedies 
and criminal sanctions. 
III. MONEY MARKET FUND ; 

NOTE: Refer to memo encaptioned "Regulation of Money 
Market Funds" for a description and discussion 
of the regulation of such funds. 
Within the context of the CMA, the money market fund is 
maintained at a value of $1.00 per share, thereby the total 
of shares ovmed by the customer also represents dollar value. 
Dividends are declared daily, after allowance for expenses, 
and automatically purchase additional shares. Also any free 
credit balances in the securities margin account (i.e. any 
cash that may be transferred out of the securities account 
without giving rise to interest charges) are automatically 
invested in the money market fund. Free credit balances 
may arise from the proceeds of the sale of securities or 
from accumulated dividends paid on the securities deposited 
in the account. For free credit balances less than $1,000, 
the sweep in the money market fund is weekly and for amounts 
of $1,000 or more, the sweep is daily. The daily declaration 
of dividends by the money market fund and the sweeping of 
free credit balances into the fund are designed to maximize 
earnings for the customer. These purchases of money market 
fund shares do not generate a sales commission for the 
brokerage firm. A customer may redeem shares upon request. 
Daily dividends continue until settlement which is usually 
five days. 



-3- 

L-15 



The money market fund is not held by the brokerage firm 
but rather the funds are wired through the banking system 
to a bank serving as custodian. Therefore the fund is not 
insured by SIPC nor is it insured by FDIC at the bank since 
the bank serves as custodian rather than a depository. The 
question of safety of such funds in the custody of the bank 
should be directed to banking regulators, however the SEC 
does exercise audit powers over a bank in its performance 
as custodian for a money market fund. 

Due to the success of the money market fund CMA, Merrill 
Lynch has made available under essentially the same freunework 
a CMA Tax Exempt Fund for investment in tax exempt securities, 
a CMA Government Securities Fund for investment in govern- 
ment securities, and a CMA Insured Savings Account Program 
which is an insured savings account. The customer is free 
to choose one of these funds in lieu of the money market fund. 
ZERO BALANCE CHECKING ACCOUNT ; 

This checking account is maintained at the bank and is 
provided to mutual customers of the bank and the brokerage 
firm. The account is opened with the bank; however the 
checks are printed by the brokerage firm. The customer 
does not make an initial deposit into the checking account 
but rather is provided a line of credit. The authoriza- 
tion limit is computed as the total of the uninvested free 
credit balance in the security account, the net assets 
value of the money market fund shares, and the available 
margin loan value of the securities in the securities 
account as determined pursuant to Regulation T. The author- 
ization limit will fluctuate daily and therefore is 
"refreshed" daily. The authorization limit is not based 
upon credit rating but rather a measure of real value. 



-4- 



L-16 



The customer may use this line of credit to make purchases 
of merchandise and services or to receive cash advances. 

The checking account has two access vehicles: a 
Visa charge card and a check book. Unlike standard credit 
card account procedures where bills are rendered monthly, 
the bank will notify the brokerage firm daily as to the 
amount of any Visa card or check charges that have been 
received and paid by the bank. The brokerage firm will 
promptly make payment to the bank, thereby avoiding interest 
payments to the bank, to the extent that sufficient funds 
can be provided: first from the free credit balances, if 
any, held in the securities account; second, from the proceeds 
of redemption of money market fund shares; and third, should 
these sources prove insufficient, the brokerage firm, within 
the available margin loan value, will advance such moneys 
to the bank. Any such advancement by the brokerage firm is 
secured by securities in the securities account and interest 
is charged the customer by the brokerage firm from the day 
the brokerage firm makes payment to the bank at the same 
rate and in the same manner as the interest charged by the 
brokerage firm for other margin loans. 

Should the sources of funds noted above prove to be 
insufficient to satisfy all amounts owing the checking account, 
the bank may advance the balance and will impose a charge of 
up to 18% per annum. Also should the customer enter a 
stop payment or have a check returned for insufficent funds, 
the bank will charge its customary fee. 
PERIODIC REPORTS AND VARIOUS FEES : 

Each month the customer receives from the brokerage firm 
a statement detailing all securities bought or sold in the 
customer's securities account, whether on margin or on a 
fully paid basis; margin interest charges, if any; the number 
of money market fund shares that were purchased or redeemed 
and all purchases of merchandise and services and cash 
advances that were made with the checking account. 



-5- 

L-17 



The customer also will be billed for an annual CMA fee, 
presently $50. This fee partially defrays the costs of 
maintaining and servicing the CMA accounts, including the 
processing charges of the bank which is paid by the broker- 
age f m. The brokerage fi^in also receives a distribution 
fee from the money market fund and a deposit brokerage fee 
from the depository institutions with respect to deposits 
in the money market deposit accounts available through CMA 
Insured Savings Account Program. 

The customer will receive a periodic billing statement 
from the bank which will detail any overdrafts honored by 
the bank plus finance charges thereon, payments, credits and 
the balance due. 
CONCLUSION 

The Merrill Lynch CMA is a packaging of three regulated 
accounts linked together by computer. The securities account 
and money market fund as discussed above are subject to 
regulation by the Securities Division of the Department of 
Secretary of State. It is my opinion that the State's 
securities regulation of these two components is sufficient 
particularly when considered in conjunction with the applicable 
federal securities regulation. The third component, the 
zero balance checking account, is provided by a bank through 
the brokerage firm. The question of adequacy of banking 
regulation of this component should be directed to banking 
regulators. Further in view of the fact that the CMA is 
a packaging of services, each of which have been independently 
available for some time, the CMA has provided a vehicle to 
deliver these services to a customer in a convenient manner 
that minimizes time delays and cost, and at the same time 
seeks to maximize earnings for the customer. In my view, I 
see no reason for further state regulation and I have not 
witnessed any groundswell of securities regulatory concern 
over CMA type programs. Due to the national character of 



L-18 



the securities industry and specifically the activity 
discussed herein, any regulatory concern is more 
appropriately a matter for Congressional action. 



L-19 




state of Wisconsin \ 



APPENDIX M 



OFFICE OF THE COMMISSilO 



i-EH OF SECuhTIE! 



\nthony S. Earl 
iovamor 

Vctmni R. Malmgren 
"ammissloner of Securttlea 

Stephen L. Morgan 
deputy Commissioner 

Mr. Terrence D. Sullivan 
Director of Research 
State of North Carolina 
Legislative Research Commission 
State Legislative Building 
Raleigh, North Carolina 27611 

Dear Mr. Sullivan: 



80X1788 
|(^I«DN, Wt^•O^I8IN 53701 



April 20, 1984 



QENERAL (808) 288.3491 

GENERAL COUNSEL (808) 288^888 

REQISTRAT10N (8M) 28U431 

UCENSINQ (808) 288-3883 

FRANCHISE (808) 288^9384 



Re: NASAA Questionnaire Data Regarding Cash Management 
Accounts 



This letter will serve to provide both a final summary of the 
information received in the above-referenced matter, and to confirm 
information previously communicated to you by telephone in March while 
Questionnaire data was still being received. Enclosed for your 
information is a copy of the Questionnaire as distributed by the NASAA 
Financial Institutions Sub-Committee to all NASAA member states seeking 
information as to whether any state was aware of legislation, 
rule-making, administrative proceedings or court cases in their state 
regarding so-called "cash management accounts." 

This will confirm that: 



(1) 



(2) 



At the time of our initial telephone contact on March 
13, 1984, the Questionnaire had been distributed 
(approximately 2 weeks previously) and the first 



responses were coming 



It was indicated to you that 



12 responses had been received as of that date and none 
indicated they were aware of any developments regarding 
CMA's. I indicated to you I would give you a follow-up 
call in approximately two weeks with updated 
information . 

On April 2, 1984, I indicated to you by telephone that 
an additional 12 responses had been received since our 
initial conversation and that only one 

state--Arkansas — stated that there had been developments 
regarding CMA's (see attached copy of this returned 
Questionnaire with my notes beneath question 2). The 
Arkansas Questionnaire (received March 28, 1984) did not 
enclose any draft legislation, etc. regarding the 
particulars of the CMA developments in Arkansas, and as 
I mentioned to you I then called Arkansas Commissioner 



M-1 



Lee Thalheimer on that day regat'ding specifics. As I 
confirmed to you, Ccmmissioner Thalheimer stated that he 
was aware that a bill had been introduced in their 
legislature a year or so previously by a bankers group 
requiring CMA cash to be invested in Arkansas. However, 
for a number of reasons (the sponsoring legislator was a 
very "junior" legislator without much clout and the form 
and language of the bill was not put together 
well--apparently the bill was introduced with a page 
missing) the legislation never got out of committee and 
nothing subsequent has been heard on the issue. I had 
asked Commissioner Thalheimer if he could track down a 
copy of the legislation and forward a copy. I have not 
received a copy yet but did make a follow-up call to him 
last week on the matter. I will forward you a copy as 
soon as I receive it. 

(3) As of the date of this letter, an aggregate of 30 NASAA 
member states have responded, with Arkansas being the 
only one which indicated an awareness of CMA related 
developments. 

Inasmuch as only one Questionnaire has been received in the 
last week, I anticipate that the above-summarized information 
represents the "bottom line" data on this matter, and that this seems 
like an appropriate point at which to wrap up this study (however, if 
any subsequent Questionnaires come in indicating CMA activity in a 
state, I immediately will give you a call). In summary, the 
Questionnaire data received indicates that there does not seem to be 
any current activity, and little prior activity, on this subject at the 
state level — activity of any visibility, that is. 

I trust that this information has been of help to you and 
your state's Legislative Research Commission, and if NASAA or this 
Sub-Committee can be of assistance to you on future matters, please 
give us a call. 




Randall E. Schumann 
On behalf of the 
NASAA Financial Institutions 
Sub-Committee 



RES:nj 



Mr. Franklin Tom, Committee Chairperson 
Mr. Daniel Bell 



M-2 



ir 



To; 



OHktn/Dir 

'eldncer FROM: 



RE; 



North American Securities Admlnlstrato^^^i«lation. Inc. 

im K/,!^OI AM IP 19 
All NASAA State Securities Admiriii€rators 
NASAA Financial Institutions Sub- Commit tee 
Cash Management Accounts 



RD R. MALMCREN 

I 1768 

1, Wuconfin S370I 

5 COTE 



One of the NASAA member state has requested that this 
. committee prepare and forward to all NASAA member states a Questionna 
seeking information as to whether any state is aware of legistaUon 
rule-makmg administrative proceedings or court cases in their 
state regarding so-called "cash management accounts." These are 
arrangements sponsored by certain securities brokerage firms by 
which cash deposits are accepted from clients, deposited in money 
.^^Ii!infn"^';-^"^°'K^^' °' withdrawal from the clients are honored. 
».J^,*. information is being sought by the member state in connection 
.*a^th an inquiry by its state legislature into the regulaSSn of 
banks and other financial institutions. xatxon or 

"it is r.on2^i-^;^?i^.°^ ^^^ ^^^^ Financial Institutions Committee, 
i^i%h!^rf I ^ ^°" ''^''^^'' ^"^ complete the enclosed Questio;inai 
1r^.., "^th the information you are able to provide, and return it as soon 
;.s._.n„„B„^^s practicable to the member of the Committee addressed below who 
ct;:J°So9 "^^1 correlate the response data - " 



and assistance. 



Thank you for your cooperatic 



[. -BoMtr- S 

Mil of S>L ' 



Are you aware of any legislation,^rule-making or administrative 
hearing proceedings in your state regarding cash management 
accounts? Yes ^ No ^ 



If your answer to Question 1 is yes, please describe it, its 
present status and enclose a copy of any written materials , , 
available ^^(^,w.^c^..,/^t^vvw^, C^A ..-/ ^- ^ ^ ]^ /. / 

Regarding the form of any legislation o^ rule-making, 

(a) Would any regulation of^ such accounts be by bank 
regulators? Yes ^ No 

(b) Did the legislation/rule try to restrict the way 
funds could be invested? Yes ^y^ No 



4. Has there been any litigation on the subject that you are 

aware of? If so, please provide case citations and copies of 
^ ^ ^"y decisions or pleadings you have in your possession. 

L „. c L;^ [c, |r^] ^he litigation has ended» what was the result? 



:^b^34 (if 4he li 



tigation has not ended what is the current status? 



OFFICE OF "the" 
^MISSIONER OF SECURITIES 



M-3 



7. With regard to Questions 1 and 4, who is/was the moving party? 

8. Is there any movement towaj^s future legislation or litigation? 
Yes No V 

9. If the answer to Question 8 is Yes, by whom? 



This questionnaire and any accompanying information should be 
returned to : 

Randall E. Schumann 

Office of the Wisconsin Commissioner of Securities 

P.O. Box 1768 

Madison, Wisconsin 53701 



RES :nj 



M-4 




Ichard R. Malmgren 
ommissloner of Securities 



tephen L Morgan 
eputy Commissioner 



State of Wisconsin \ office of the commissioner of securities 

K r la r I L ^ 11 1*«ST WILSON STREET 

■ ^ "^ *- ' * ' 80X1788 

MADISON. WISCONSIN 63701 

^■Pf^ 27 oiiMMu. ,808,28^1 

QENERAL COUNSEL (808)288-9888 
REGISTRATION (808) 28M431 



April 23, 1984 



Mr. Terrence D. Sullivan 
Director of Research 
State of North Carolina 
Legislative Research Commission 
State Legislative Building 
Raleigh, North Carolina 27611 

Dear Mr. Sullivan: 

Re: NASAA Questionnaire Data Regarciing Cash 
Management Accounts 

Supplementing my April 20, 1984 letter on the 
above-referenced subject, enclosed is a photocopy of the 
Arkansas legislation as received today. 



Ver 




Randall/E. Schumann 
General/ Counsel 



RES:sk 



cc: Mr. Franklin Tom, Committee Chairperson 
Mr. Daniel Bell 



M-5 



.SI;ilr of ArkHiiiJi-s r^^.-.-.-.. .-> 

', 73rd Criiir:.! Assiinl.lv 
,IUKiil:ir Sission. 1981 



bill ^ HOUSE BILL 584 



Fil 

By: Representative G. Wilson . , , . - . , 

For An Act To Be Entitled 

1 "AN ACT TO PROVIDE FOR THE FILING OF A COMMUNITY REINVESTMENT 

2 STATEMENT BY PERSONS l>niO SELL SECURITlC INTERESTS IN MONEY MARKET 

3 FUNDS, AND FOR OTHER PURPOSES." 
4 

5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF ARK.AJJSAS : 
6 

7 SECTION 1. Definitions and use of Terns. As used in this Act, un- 

8 less the context otherwise requires: 

9 (a) "Security" means any note; stock; treasury stock; bond; debenture; 

10 evidence of indebtedness; certificate of interest or participation in any 

11 profit-sharing agreement; collateral trust agreement; collateral-trust 

12 certificate; preorganization certificate or subscription; transferable 

13 share; investment: contract; variable annuity cont-act; voting-trust certi- 

14 ficate; certificate of deposit for a security; certificate of interest or 

15 participation in an oil, gas, or mining title or lease or in payments out 

16 of production under such a title or lease; or. in general any interest or 

17 instrument commonly known as a "Security" or any certificate of interest or 

18 participation in, temporary or interim certificate for, guarantee of, or 

19 warrant or right to subscribe to or purcliase, any of the foregoing. 

20 "Security does not include any insurance or endowment policy or annuity 

21 contract or variable annuity contract issued by any insurance company. 

22 ^ - — 7><b) The Commissioner may apply to the Circuit Court of Pulaski County 

23 for the enforcement of any order pursuant to this section and such court 

24 shall have jurisdiction and power to order and require compliance therewith. 

25 (c) Any person who shall violate any provision hereof shall be guilty 

26 of a misdemeanor and, upon conviction thereof, shall be subject to a fine 

27 not to exceed Five Thousand Dollars ($5,000.00). Each day or part of a day 

28 during which such violation is continued or repeated shall constitute 

29 separate offense. 
30 . 

31 SECTION A. Regul 



32 



gulations. The Conraiss loner shall have the power to 
enact and promulgate such regulations as he deems necessary or appropriate 

M-6 



.64 



to carry out. the provisions of tliis Act. 



SECTION 5. If any provision of this Act or the application thereof, 
is held invalid, such invalidity shall not affect other provisions or 
applications of this Act which can be given effect without the invalid 
provision or application, and to this end the provisions of this Act are 
hereby declared severable. 

SECTIOK 6. All laws and parts of laws in conflict herewith are 
hereby repealed. 



M-7 



JU-Iuh.r ScsMon. 1981 .*-^-Jai.3 HOUSE BILL OOO 

By: Representative J. Gregory Wilson 

For An Act To Be Entitled 

1 "AN ACT TO PROTECT DEPOSITORY FINANCIAL INSTITUTIONS 

2 /VND DEPOSITORS THEREIN FROM MISLEADING ADVERTISING; 

3 TO PROHIBIT THE USE OF CERTAIN TERMS BY PERSONS OTlUiR 

4 TH^v:^- DEPOSITORY FINANCI.\L INSTITUTIONS; TO PROVIDE 

5 PENALTIES FOR VIOLATION; AND FOR OTHER PURPOSES." 

6 

7 BE IT ENACTED Bf THE GENERAL ASSEMBLY OF THE STATE OF ARKANSAS: 

8 

9 SECTION 1. Definitions and Use of Terns. As used in Lh±3 Act, 

10 unless the context otherwise requires: 

\l (.i) "Coiiunissioner" means the Bank ConniLSS Loner of th. St.'ie or' 

12 Arkansas or his designee. 

J 13 (bX "Person" means any individual, business assoc iar : .>n , coriKTeLion 

14 trust where the interests of beneficiaries <^rc evidenced by a seceriry, 

15 f.-.-o or n'lro persons having a joini or common interest, or an-' f^thsr I'-f^al 
15 or corrxiercial entity. 

17 (c) "Depor. itory Financial Institution" means any ban.., trM.iC ■OTpariy 

13 or savings bank chartered under the banking laws of chf Sua*:e in.', a 
lO national bankinc; association chartered n:ider the bai'.king laws of the 

20 UnitLrd States; any ravings and loan association chartered iiiuier the Lj.vfs 

21 of this State or the United States; and any credit union ch.Ttered under 

22 the laws of this State or the United States. 
23 

y^ V 24 SECTION 2. No person other than a bona fiee depository financiil 

j' 25 ! institution sh.ill in any manner directly or Indirectly in wriuten o. 

' 2G vt'thal advertising or description of its services/r uike nse of the term s_]) 

27 savings account, sa>.'lngs deposit, certificate of deposit, savin-, s certifi- 

28 catc, roney market certificate, or passbook or chrcltin;; accoant. 
29 

1 30 SECTION ^. Cease and Desist Order; Enforcer.ient -, Penalty 

31 ''n) Whenever it shall ap|)ear to the Commissioner that any per.-.on has 

32 violated this Act, the Comjniss J oner may issue and servj u(-.>n suc.li pers>.u 

M-8 



„.B. 5S5 

a notice, by registered mail, containing a statement of the facts - ^^k 

constituting the alleged violation or violations, and fixing a tine and ^^ 
place at which a hearing with such person will be held to determine whether 
an order to cease and desist therefrom should be issued. If the alleged 
violator faits. to appear at the hearing it shall be deemed to have con- 
sented to the issuance of a cease and desist order. In the event of such 
consent, or if after the hearing the Commissioner shall find that any 
violation has been established, the Commissioner may issue and serve 
upon such person an order to cease and desist from any such violation. 



e 



2 - 

M-9 



APPENDIX N 

MEMORANDUM 

RE: INSURANCE OF INVESTMENTS BY NORTH CAROLINIANS IN MONEY 
MARKET MUTUAL FUNDS 

DATE: March 30, 1984 

The question has been raised whether the North Carolina 
Legislature should be the only state in the country to adopt a 
statutory requirement that any investment in shares of a money market 
mutual fund made by a state's investor be insured. For the reasons 
set forth below, the North Carolina Legislature should not impose 
such a requirement and may even lack the authority to do so. 

Constitutionality . It is possible that any attempt by North 
Carolina to require insurance of money market fund shares will be 
found to be unconstitutional as an impermissible burden on interstate 
commerce. The Supreme Court has said that "[w]here uniformity is 
essential for the functioning of commerce, a state may not interpose 
its local regulation". Morgan v. Commonwealth of Virginia , 328 U.S. 
373, 377 (1946) quoted in State Ex Rel. Util. Com'n v. So. Bell Tel. , 
217 S.E.2d 543 (N.C., 1975) at 549. 

Make Funds Unavailable . An insurance requirement would force 
money market funds to stop offering their shares to citizens in North 
Carolina and non-insured shares in the other forty-nine states would 
be in violation of the federal Investment Company Act of 1940. The 
Act, which was specifically enacted to protect mutual fund 
shareholders and to regulate mutual funds, does not permit money 
market funds to have more than one class of shareholders. If a money 
market fund sought to offer insured shares in North Carolina and 



N-1 



uninsured shares in the other forty-nine states, two classes of 
securities would be created. This two-class structure would be in 
violation of the Investment Company Act. Moreover, the boards of 
directors of money market funds would not decide to avoid this 
problem by having all shares of the money market fund insured since 
investors nationwide have indicated a clear preference for money 
market funds which are not insured. Nationally, fewer than .0002 
percent of shareholder accounts invested in money market funds are 
invested in insured money market funds. Given the choices of 
violating the Investment Company Act, purchasing insurance which is 
not desired by the vast majority of investors, or ceasing sales in 
North Carolina, money market fund directors will be forced to decide 
to cease sales in the State. 

It is unlikely that fund groups would create insured money 
market funds specifically for North Carolina investors. The costs of 
forming and operating a separate fund for North Carolina are likely 
to make this approach economically unfeasible. This is particularly 
true in this case since investors in North Carolina have also 
demonstrated that they have little interest in investing in an 
insured money market fund. 

Conceptually Unsound . Money market fund shares are equity 
investments in companies and, as such, need insurance no more than do 
other equity investments in securities. Shares of money market funds 
can only be offered to investors when accompanied or preceded by a 
statutory prospectus, the content of which is specified by 
regulations adopted by the federal Securities and Exchange Commission 



2 - 

N-2 



(SEC) . These prospectuses are subject to review by the SEC and by 
the North Carolina Securities Commission. They explain clearly the 
nature of the investment as equity shares in a company. Furthermore, 
advertisements for money market funds are subject to regulation by 
the SEC and the North Carolina Securities Commission. 

The Legislature would be requiring North Carolina investors to 
obtain insurance which they have decided is not necessary. North 
Carolinians have weighed the expense of investing in an insured money 
market fund against investing in non-insured funds, and have 
overwhelmingly determined to invest in non-insured funds. 

Conclusion . An insurance requirement may well be 
unconstitutional and is unnecessary, unwanted and inappropriate. 
Enactment of the proposal would have one certain effect — making 
North Carolina the only state to deprive its citizens from investing 
in high-yielding money market funds. 



The cost of insurance involves not only the cost of the 
insurance premium, which may be as high as 45 basis points, but also 
the reduced yield resulting from complying with the investment 
restrictions imposed by the insurance company, which can be about 10 
basis points. Thus the costs of insurance may reduce yields of money 
market funds by over one-half of 1% (e.g., from 8% to 7 1/2%). 

JDB208/F 



- 3 - 

N-3 



APPENDIX 

/ 3' 



STATEMENT OF THE INVESTMENT COMPANY INSTITUTE 

BEFORE THE NORTH CAROLINA COMMITTEE ON THE 

TAXATION OF BANKS, SAVINGS AND LOAN ASSOCIATIONS 

AND CREDIT UNIONS 



I am Matthew P. Fink, Senior Vice President and General 
Counsel of the Investment Company Institute. With me is Mary 
Bellamy, Assistant Counsel of the Institute. The Institute is the 
national association of the American mutual fund industry. Its 
membership includes over 1,100 open-end investment companies, or 
mutual funds, and their investment advisers and principal 
underwriters. Of those mutual funds almost 300 are money market 
funds. 

We thank you for this opportunity to appear before you today. 

Mutual funds, organized in corporate or trust form, are 
companies which permit thousands of investors to pool their 
resources to invest in a diversified pool of securities. ^Some 
mutual funds invest in common stock, corporate bonds, or tax- 
exempt state and municipal bonds. One type of mutual fund, a 
money market fund, invests in money market instruments, such as 
U.S. Treasury bills, bank certificates of deposit and commercial 
paper. All of the net income earned by the fund from these 
securities is distributed to its shareholders. A mutual fund 
shareholder may cash in (redeem) his shares at any time and 
receive his pro rata portion of the fund's investment. 



Q-1 



The legal structure of the money market fund and the 
relationships among the parties are determined by federal and 
state securities laws, particularly the Investment Company Act of 
1940. 

Mutual funds, including money market funds, have been 
characterized as the roost strictly regulated business entities 
under the federal securities laws. In the words of a former 
Chairman of the United States Securities and Exchange Commission, 
Ray Garret, Jr., "No issuer of securities is subject to more 
detailed regulation than mutual funds." 

At the federal level, the Securities Act of 1933 requires a 
mutual fund to provide prospective investors with a current 
prospectus containing detailed information about the fund and its 
investment policies. The anti-fraud provisions of the Securities 
Exchange Act of 1934 apply to the purchase and sale of fund 
shares. Investment advisers to mutual funds are registered with 
the SEC under the Investment Advisers Act of 1940 and are 'subject 
to the restrictions in that Act. Most importantly, the mutual 
fund itself must register with the SEC under the Investment 
Company Act of 1940, which is a highly detailed regulatory '_ 
statute. In addition to requiring periodic reports to 
shareholders and the SEC, the Investment Company Act contains 
numerous direct regulatory provisions designed to prevent self- 
dealing, to maintain the integrity of fund assets and to prevent 
the payment of excessive fees and charges by the fund and its 



0-2 



shareholders. Finally, mutual funds are subject to inspections by 
the SEC staff. 

In addition to this extensive federal regulation, mutual 
funds which offer their shares in North Carolina must also 
register their shares in North Carolina and are subject to 
regulation by the Securities Division of the Department of State. 

There are many kinds of money market funds. Generally, money 
market funds invest in all types of high quality money market 
instruments, i.e., U.S. government obligations, bank certificates 
of deposit and high quality commercial paper. However, some money 
market funds invest only in U.S. government obligations, while 
others invest only in tax-exempt short-term municipal securities. 
Some money market funds are marketed to a wide variety of 
individuals through advertisements. Other money market funds are 
marketed to the customers of brokerage firms. Still other money 
market funds are dedicated to specific purposes. For example, 
some money market funds are sold only to institutional investors, 
such as banks which sweep cash balances of their trust and other 
accounts into money market funds. Other money market funds are 
sold to insurance company separate accounts which use them to fund 
variable annuity and variable life insurance contracts. Still 
other money market funds are only sold to customers of securities 
firms who have asset management accounts. Asset management 
accounts are financial services which many securities firms offer 
to investors. They link a customer's regular securities account 



0-3 



and zero balance checking account with money market fund shares 
owned by that customer. 

Most money market funds and many other mutual funds offer 
investors expedited methods of redemption, that is methods by 
which an investor may obtain part of or all of the current value 
of his investment in the fund. Investors desire, and sometimes 
require, that they receive their money on an expedited and 
convenient basis. They also desire the ability to direct payments 
to a third party to purchase, for instance, an automobile, or to 
pay college tuition or to send money to a child in college. 

The expedited methods of redemption, however, do not 
transform a mutual fund into a bank. Federal and state officials, 
including SEC Commissioners, the Comptroller of the Currency, the 
Assistant Attorney General of the U.S. Department of Justice, the 
General Counsel of the Federal Reserve Board, and state Attorneys 
General, have stated that investors in money market funds, like 
other mutual funds, are equity shareholders in a company, 'and are 
not depositors. As the opinion of the Assistant U.S. Attorney 
General stated: "It is patent. . .that a depositor is only a 
creditor of his depository... It is equally patent that one who 
invests in a money market fund is the owner pro tanto of the 
fund." 

Money market funds compete with some of the services offered 
by banks and thrifts. To make that competition as fair as 
possible. Congress has permitted banks and thrifts, since December 
of 1982, to offer market rates of return on their Money Market 



Deposit Accounts which Congress required to be "directly 
equivalent to and competitive with money market mutual funds." 

Banks and thrifts have been very successful in attracting 
deposits with this new account: they currently have more than 
$383.2 billion in Money Market Deposit Accounts. Meanwhile, 
assets of money market mutual funds have declined more than $52.7 
billion since November 1982 to less than $182.4 billion by mid- 
September, 1984. Thus, the bank and thrift Money Market Deposit 
Accounts now have more than twice the assets of money market 
mutual funds and banks and thrifts hold another $43.3 billion in 
the Super Now accounts. The total deposits of banks and thrifts 
exceed $3.7 trillion. 

In recent years committees in both houses of Congress have 
held hearings on money market funds. Six federal regulatory 
agencies concerned with some aspect of the regulation of money 
market funds, including the Federal Reserve Board, the Comptroller 
of the Currency, and the SEC appeared and testified that they were 
satisfied with the current regulation of money market funds. They 
recommended no additional regulation and Congress adopted none. 
Similarly, legislation providing for additional regulation 'of 
money market funds has been considered in over twenty states, 
including North Carolina, but has not been enacted in any state. 

We do not believe that there is a need for any additional 
regulation of money market funds. That opinion is apparently 
shared by the relevant regulators in North Carolina. When 
legislation was introduced in North Carolina in 1981 to bring 



0-5 



money market funds under the definition of bank for purposes of 
the state banking code, the Secretary of State opposed the bill. 
More recently, when Daniel Bell, North Carolina's Deputy 
Securities Administrator, testified before this panel, he did not 
call for any additional regulation of money market funds. 

We would be happy to answer any questions you may have. 



0-6 



APPENDIX P 



<^^u.i/uu:^ -zz^ 



Financial Institutions Assurance Corporation 



Statement Of 

DONALD R. BEASON 

President and Chief Executive Officer 
FINANCIAL INSTITUTIONS ASSURANCE CORPORATION 

Before 

The Committee on Taxation and Regulation of 

Banks, Savings and Loan Associations, and Credit Unions 

Legislative Research Commission 

NORTH CAROLINA GENERAL ASSFM«LY 



March 15, 198A 



'P-1 



We appreciate this opportunity to present to you the information 
requested in your letter dated January 30, 1984 for your study of the 
important issues concerning the oversight and taxation of financial 
institutions. The information you have asked us to present concerns; how 
we regulate, how we are regulated, a comparison to other private insurers 
(with emphasis on the Nebraska Fund), and a comparison to the FSLIC. 

As the deposit insurer for 34 state chartered savings and loans and 25 
credit unions in North Carolina, we have a concerned interest in your 
activities and, we hope, some insights into the activities of our insured 
institutions that will aid you in your study. 

The FIAC, since its inception in 1967, has grown from insuring $50 
million in deposits to nearly $2.8 billion in deposits at the end of 
1983. In that time period, we have not incurred any insurance losses or 
claims — a record unmatched by any other deposit insurer, public or 
private. 

This period of time encompassed a number of business cycles including one 
of the most volatile swings of interest rate levels in recent years. For 
example, from 1978-1983 the 3 month Treasury security rose from as low as 
7.19% in 1978, to 14.03% in 1981, and back down to 9.3% in 1983 (Exhibit 
1). This economic turmoil dramatically affected the industry as 
illustrated by Exhibit 2 which shows the number of mergers and 
liquidations experienced by the federal deposit Insurers. There are a 
number of reasons that account for our record of safety during this 
period. First, by signing our insurance contract, each member of our 
corporation agrees to adhere to our Standards and Procedures. These 
rules and regulations are very straightforward, concise, and speak 
strictly to those safety and soundness issues which we feel are necessary 
to insure the continued viability of our members. As a consequence they 
do not contain references to various "social engineering" issues nor do 
they impose burdensome regulatory requirements. 

On the other hand, they do provide us with the powers that are needed to 
properly perform the deposit insurance function — for example, special 
examinations can be performed, or independent consultants can be retained 
to address specific problem situations. We also reserve the right to 
take more harsh actions if needed. Such actions, which could include the 
removal of officers or board members, are not taken without consultation 
with the appropriate state regulator. At the heart of our supervisory 
oversight function is our Financial Analysis System which is based on the 
monthly financial information sent to us by our members. Exhibits 3, 4, 
and 5 are examples of the monthly information which is compiled by our 
state-of-the-art computerized system. The reports we prepare are 
designed to give us timely, accurate data about the financial condition 
of each of our members. 

Of course a system such as this would be virtually useless if it were not 
analyzed and interpreted by competent staff. We are very proud of the 
talent we have assembled for our supervisory staff which includes CPA's, 
MBA's, former internal auditors, and former state examiners. They 
perform detailed reviews from the monthly information and prepare a 
monthly report for our Underwriting Committee. 



-1- 
P-2 



The Underwriting Committee is composed entirely of public members of the 
Board of Trustees in order to insure the confidentiality of our member 
information. The Committee members Include Individuals with many years 
of experience in various disciplines Including risk management, public 
accounting, management of financial institutions, and business. The 
Underwriting Coranittee, in effect, reviews the recommendations of staff 
and makes their own recommendations concerning the appropriateness of 
actions taken or contemplated. The monthly report prepared for their use 
is quite detailed and contains many of the computer-generated statistics 
and graphs that the staff has prepared to summarize financial 
information. Exhibits 6 and 7 are the resumes of the Underwriting 
Committee and staff. 

The other part of our oversight function is the on-site visitation 
program we employ to obtain additional information concerning the 
operations of our members. In this program we are able to obtain 
information of the type that does not necessarily show up in the monthly 
reports we receive and analyze. Information concerning management's 
planning process, their products and services are discussed and we are 
used "as a sounding board" to discuss the financial and operating 
ramifications of new ideas or plans. By making these visits and staying 
attuned to what is happening in the Industry, we are able to act almost 
as consultants to our members. 

One of the services we provide to our members, the diagnostic review, is 
a management consulting project that would cost $8,000 to $20,000 if 
prepared by an independent consultant. The diagnostic review is an 
operational audit. As a third party, we are able to bring our areas of 
expertise In financial planning, productivity, and strategic planning to 
bear in those areas we believe improvements can be made and profitability 
increased. We believe these capabilities set us apart from other private 
insurers and the federal insurers, and is partly responsible for the 
national reputation we have acquired. A sample diagnostic review is 
Included in Section 8 of this booklet. 

External Regulation 

The FIAC is regulated by the North Carolina Department of Commerce. The 
examination itself is conducted jointly by a combination of savings and 
loan and credit union examiners from that department. During the 
examination process, our underwriting procedures, quality and liquidity 
©f the investment portfolio, and condition of insured institutions are 
reviewed as well as tests performed on our financial records. We feel 
very strongly that one of the keys to our success is the strength of the 
various regulatory authorities and the excellent level of communication 
that we maintain with them. In fact, as a part of our planning process 
we have adopted the position that we will not enter into a new state 
until we have determined the adequacy of the regulatory process, the 
quality of the examining staff, and our ability to maintain the lines of 
contact and communication similar to those we built in North Carolina. 
Regulatory oversight exercised by the other states in which we do 
business is modelled on the North Carolina process. The key point in the 
regulatory system is that we are examined by the regulators in the same 



P-3 



manner as they examine our insured members, with safety and soundness as 
the driving forces. 

Nebraska Situation 

A detailed report on the Nebraska situation is included in this booklet. 
In summary the Nebraska Guaranty Corporation was nothing more than a fund 
of money with no professional risk management capabilities or powers. In 
fact there was no management. 

The fund made a practice of refunding to its insured members the excess 
of its revenues over expenses each year. Its only employee was a 
part-time clerk whose sole function was to collect the annual assessment 
of members. Its Board of Directors consisted entirely of members 
affiliated with insured institutions. As a consequence, there was no one 
to monitor the financial condition of the entities other than the state 
regulator, who was so concerned about the ramifications of a failure that 
he was reluctant to take the stringent measures that were required. 

When Commonwealth Savings and Loan got into financial difficulty, the 
regulator allowed them to satisfy capital requirements by accepting real 
estate contributed to the company by its owner. Exhibit 8 shows the 
liquidity problems of the Commonwealth Company. The capital ratios 
appear steady, when in reality it was a "pumping in" of capital which 
really had no value. Exhibit 9 shows details of these problems and 
indicates that problems were apparent as early as 1978. 

Commonwealth was owned by one of the state's most well-known real estate 
developers, whose reputation exceeded his business acumen. Many 
questionable practices were uncovered when all the investigations were 
completed, such as loans with no amortization requirements, insider 
loans, questionable profit recognition of real estate sales, possible 
illegal arrangements with the State Attorney General, and a host of other 
unsound business practices. 

At the time of closing, it was estimated that the company was the largest 
single land owner in the city of Lincoln, owning enough undeveloped 
residential lots to supply Lincoln's building needs for the next ten 
years. It is our considered opinion that this situation could not 
develop under the FIAC system. 

Comparisons to FSLIC 

Finally, we have provided some comparative information on FIAC and FSLIC. 
The information assembled will show how we stack up as an insurance 
company with FSLIC as well as compare certain information on the 
institutions insured. Exhibit 10, the Comparative Balance sheet shows a 
breakdown of each fund's assets and liabilities as a percentage of total 
assets and liabilities respectively. It shows that FIAC's balance sheet 
consists almost entirely of liquid assets while FSLIC has significant 
amounts tied up in loans to failing institutions and "net worth 
certificates". Exhibits 11 and 12 graphically shows this to be true. 



-3- 
P-4 



As to the liability side of the balance sheet, FSLIC has recorded loss 

reserves of $705 million which does not include $422 million in 

contingent liabilities under existing contribution agreements with 
successors to failed institutions. 

Turning to the income statement in Exhibit 13, this chart shows how the 
gross revenues of the two funds were distributed. In 1983, 62 cents of 
every gross revenue dollar earned by FIAC, after paying administrative 
expenses, was added to our general reserves. By contrast, in 1982, FSLIC 
alter paying for the cost of assistance and liquidations, only added 12 
cents of each revenue dollar to its reserves. 

Our investment portfolio of December 31, 1983, had an average remaining 
term of about 18 months. We believe it is very Important to keep a 
prudent amount of liquid assets on hand to meet any unforeseen needs. 
Exhibit 14 shows a break down of our investment portfolio as to maturity 
date. These figures do not include over $8 million of cash that we had 
at December 31, 1983. Because FSLIC does not present similar data in its 
annual reports it is difficult to present comparable figures. 

Wliile FSLIC' s reserves have remained relatively stable. Exhibit 15 shows 
the increase in FIAC's reserves over the past five years. In 1979, FIAC 
had approximately $18.9 million in available funds to cover losses. By 
1981 the available funds increased to $42 million and by 1983, to over 
$70 million in funds available to cover losses. 

Of course, the insurer's net worth is only a secondary reserve from which 
losses must be absorbed. The net worth of the insured Institution is the 
primary source from which losses can be paid. 

The contrast of our members' net worth to FSLIC-insured institutions is 
graphically portrayed in Exhibit 16. FIAC institutions consistently have 
maintained about one full percentage point higher net worth ratios over 
the past five years. 

It should be pointed out that for the FSLIC' s purposes, net worth could 
consist of items in addition to that which is allowable under Generally 
Accepted Accounting Principles (GAAP). FIAC uses GAAP in calculating net 
worth. Under Regulatory Accounting Purposes (RAP) used by FSLIC, a 
savings and loan is allowed to write off certain losses over a period of 
years rather than immediately charging them against net worth. In 
addition, under RAP a savings and loan may write up the value of its land 
and buildings to their appraised values and add this write up to net 
worth. FSLIC savings and loans may use so-called "net worth 
certificates" issued by the FSLIC as net worth. 

In addition to mandating the use of GAAP to determine net worth, FIAC 
requires all its savings and loans to maintain a net worth of at least 5% 
of savings. FSLIC uses a sliding scale to determine required net worth 
levels based on the length of time the association has been operating and 
generally allows net worth to fall below 3% of assets before beginning to 
consider what actions to take. Additionally FIAC insured savings and 
loans enjoy higher levels of liquidity ratios than FSLIC associations as 
demonstrated in Exhibit 17. As to levels of fund balances to Insured 



P-5 



savings. Exhibit 18 presents those ratios for various insurers, both 
private and government. FIAC enjoys one of the highest ratios of any of 
these insurers. 

With respect to the FSLIC ratios, two recent comments by Edwin Gray, 
Chairman of the FHLBB, are worth noting. On January 31, 1984, Mr. Gray 
commented that "a substantial part... "of the FSLIC' s reserves". . .will be 
required to pay for liquidations and costly assisted mergers we can 
foresee or expect in 1984 alone." 

In the Wall Street Journal of March 7, 1984, Mr. Gray indicated that the 
possibility existed for the FSLIC to increase premiums in 1984, due to 
the dangers faced by the FSLIC. This increase could be as much as 1/8 of 
1 percent of deposits, and if implemented could cost FSLIC-insured 
savings and loans as much as $780 million annually — nearly one half of 
the industry's total 1983 profits. 

On the NCUA side of the coin, their present ratio of .03% of funds to 
deposits has led them to propose a permanent deposit assessment of 1% of 
savings. In order to get this approved, they will probably have to 
provide for a rule that requires them to return to the members any fund 
balances above 1.3% of savings, effectively prohibiting them from ever 
Increasing the ratio above that level. Exhibits 19 and 20 show the 
number of NCUA assisted liquidations and assisted mergers for the time 
period 1978 through 1982 and effectively demonstrate the problems the 
that deposit insurer is facing. 

Summary 

Since FIAC's inception in 1967, the combination of our financial 
oversight and supervision, along with enlightened state regulation have 
provided FIAC members the freedom to operate in a prudent, businesslike 
fashion. In turn, our members have used the advantage of the dual system 
of chartering to become effective and efficient competitors in today's 
deregulated marketplace while operating with the highest levels of safety 
and soundness. 



-5- 
P-6 



INTEREST RATE HISTORY 

Traaaury S«eurltl«* 



INTEREST RATE HISTORY 



1978 
1979 
1980 
1981 
1982 
1983 




7.19 


7.58 


7.74 


10.07 


10.06 


9.75 


11.43 


11.37 


10.89 


H.03 


13. SO 


13.14 


lO.&l 


11.07 


11.07 


9.30 


9.74 


10.10 



P-7 



APPENDIX Q 



Regional Reciprocal Interstate Transactions: 

Authority over North Carolina Bank Holding Companies by other 
Southeast Region States 



If a North Carolina bank holding company (NCbhc) makes an acquisition 
in Florida, Georgia or South Carolina, the NCbhc will find itself subject to 
the jurisdiction of the banking regulator of any such state as shown in the 
following summary. 

1. Florida . Acquisition of a Florida bank (state or national) or of a Florida 
bank holding company by a North Carolina bank holding company. 

Application must be made to the Florida Department of Banking and Financce 
which must make findings almost identical to those provided in the North Carolina 
interstate law concerning reciprocity, mirror image test, etc. The target Florida 
bank or bank holding company must have been in business for more than 2 years. 

The Department must also make findings on the following: 

(a) Whether or not the officers and directors of the North Carolina 
bank holding company are qualified by character, experience and 
financial responsibility to control and operate a Florida 
institution. 

(b) Whether or not the acquisition would be prejudicial to the 
interests of the depositors, creditors and public of Florida. 

2. Georgia . Acquisition of a Georgia bank (state or national) or bank holding 
co-npony by a North Carolina bank holding company. 

Application must be made to the Georgia Department of Banking and Finance 
which must make findings almost identical to those provided in the North Carolina 
interstate law concerning reciprocity, mirror image test, etc. The target Georgia 
bank or bank holding company must have been in business 5 years or more. 

The Department must also make findings on the following: 

(a) Whether the acquisition will result in a monopoly. 

(b) Whether the acquisition will substantially lessen competition. 

(c) Whether the North Carolina bank holding company has adequate finan- 
cial and managerial resources. 

(d) The future prospects of the North Carolina bank holding company 
and the Georgia institutions. 

(e) Whether the transaction will promote the needs and convenience of 
the community to be served. 



Q-1 



All Georgia bank holding companies and any North Carolina bank holding 
company which acquires a Georgia bank or bank holding company must also: 

(a) Register with the Commissioner. 

(b) Hake reports as required by the Commissioner. 

(c) Submit to examination by the Commissioner and pay costs for such 
examination. 

(d) Be "regulated, controlled and examined by the Commissioner to the 
same extent that he regulates, controls, and examines state banks... 
under his jurisdiction." 

3. South Carolina . Acquisition of a South Carolina bank (state or national) 
or bank holding company by a North Carolina bank holding company. 

Application must be made to the State Board of Financial Institutions 
which must make findings almost identical to those provided in the North Carolina 
interstate law concerning reciprocity, mirror image test, etc. The target South 
Carolina bank or bank holding company must have been in business for 5 or more 
years. 

The Board must also make findings on the following: 

(a) Whether the acquisition will result in a monopoly. 

(b) Whether the acquisition will substantially reduce competition. 

(c) Whether the North Carolina bank holding company has adequate finan- 
cial and managerial resources. 

(d) The future prospects of the North Carolina bank holding company 
and the South Carolina instftution. 

(e) Whether the transaction will promote the convenience and needs of 
the community to be served. 

All South Carolina bank holding companies and any North Carolina bank 
holding company which acquires a South Carolina bank or bank holding company 
must also: 

(a) Register with the Board. 

(b) File reports as required by the Board. 

(c) Submit to examinations by the Board and pay costs for such 
examinations. 

4y Virginia . Virginia has not yet adopted a regional interstate banking 
"aw, A draft of a bill to be introduced next year in Virginia has been made 
available to the North Carolina Commissioner of Banks. This bill is regional, 
reciprocal and includes North Carolina in its region. 



Q-2 



In addition to the standard findings about reciprocity, mirror image test, 
etc., found in the laws discussed, a North Carolina bank holding company acquirinq 
a Virginia bank (state or national) or bank holding company would be subject 
to further processing as follows; 

(a) Findings that the acquisition would not be detrimental to the 
safety and soundness of the North Carolina bank holding company 
or the Virginia institution. 

(b) Findings that the North Carolina bank holding company, its 
directors and officers as well as those of the Virginia institution 
are qualified by character, experience and financial responsibility 
to control and operate a Virginia institution. 

(c) Findings that the acquisition would not be prejudicial to the 
interests of the depositors, creditors, beneficiaries of fiduciary 
accounts or shareholders of the North Carolina bank holding company 
or the Virginia institution. 

(d) Findings that the acquisition is in the public interest. 

The Virginia bill will also call for examination and reporting by North 
Carolina bank holding companies as well as Virginia bank holding companies. 

All of the Southeastern states including North Carolina which have allowed 
interstate bank acquisitions have statutory provisions empowering the state 
banking regulators to enter into cooperatiwe agreements concerning examination 
and reporting by bank holding companies. 

In a situation where a North Carolina bank holding company was acquiring 
a Southeast regional bank in another state, the regulator in the target state 
could rely on the information supplied by the North Carolina Commissioner of 
Banks to make the findings described in this report if the North Carolina Com- 
missioner of Banks had authority to examine North Carolina bank holding companies. 
The North Carolina Commissioner of Banks could also supply the continuing exami- 
nation of the North Carolina bank holding company that is required of the state 
regulator where the acquired bank is located. 

As matters stand now, out-of-state regulators have authority over North 
Carolina bank holding companies which North Carolina statutes do not grant the 
North Carolina Commissioner of Banks. 



Q-3 



APPENDIX R _ ^ 

Mark G. Lynch' s Notes for Comnents To 

Legislative Research Commission's Committee on the 

Regulation and Taxation of Banks, Savings and Loans, and Credit Unions 

January 12, 1984 

Thank you for the opportunity to appear before you to respond to 
certain questions your Co-Chalrmen expressed to me through Terry Sullivan, 
your Director of Research. 



r^=Hasr#..r4^?^Eiefi^^^5j^&«^ 



prepared by the Department of Revenue. They are: -r-n .__ . —z-s:^.:^ 

1. Exhibit 1 - "Brief History of the Taxation of Banks & Savings V'- 
i Loan Associations" '• ' M -^.y 'r^^^f^. 

2. Exhibit 2 - "Differences in North Carolina Tax Treatment 

of Banks and Savings and Loans Associations as of January 1, 
1984" 

3. Exhibit 3 - "Comparative Analysis of North Carolina Tax 
Collections From Banks and Savings and Loans for the Years 
Indicated" - specifically the past three fiscal years 

Exhibit 3A - "Intangibles Tax Collected From Depositors on 
Money on Deposit" 

These exhibits are self-explanatory and it would take an 
excessive amount of your time at this meeting for me to go through them 
In detail. I hope you will study them later. Therefore, I will not 
discuss all the details shown on these exhibits relative to the differences 
in the tax treatment of these financial institutions. 

You will note from the "History" schedule that there were major 
changes in the taxation of banks in 1957 and 1974; of mutual savings 
and loans in 1957 and 1982; and of stock-owned savings and loans in 
1979 and 1982. Stock-owned savings and loans were first authorized 
in 1977. 



R-1 



My comments will be directed principally toward the current 
differences lf> taxation of these institutions. 

Banks are subject to the same income and franchise taxes as regular 
corporations. They are subject to intangibles tax the same as regular 
corporations except that.they are exempt. from tax on money, on deposit ... 



^3raa^^3^3335^Ston&3e£003nmT 



$1 million of total assets on a quarterly average basis. 

"WutuaT" and "Stock-owned" Savings and Loans are taxed the same. 
They also are subject to income and franchise tax and to intangibles 
tax on money on deposit and money on hand, but are not subject to tax 
on other intangibles. 

Credit Unions are exempt from North Carolina income, franchise, 
and Intangibles tax. 

The responsibility for collecting income and franchise tax from 
mutual savings and loans and stock-owned savings and loans was transferred 
from the Department of Commerce to the Department of Revenue in 1983. 

It also was suggested that I comment on whether in rny view, as 
Secretary of Revenue, there are inequities in North Carolina taxation 
of different types of financial institutions, and to indicate specifically 
liow these inequities should be remedied. 

I have not attempted to respond to this question for several 
reasons. Historically, the Secretary of the North Carolina Department 
of Revenue has not taken a position on inequities of taxation between 
categories of taxpayers. As we all know, this taxation has been a very 
controversial and complex issue and has been studied previously In great 
depth by many legislative committees and individuals. Also, I personally 
believe that for me to express myself on this subject would not be an 
appropriate iposture for me in that the Secretary of Revenue's primary 
responsibility is to administer the revenue laws that the General 
Assembly enacts, and in my opinion, it would greatly decrease the 



R-2 



- :r 



Secretary's effectiveness in administering the laws i-t he involved 
himself in taking positions as to inequities in taxation of different 
segments of our taxpayers. 

Department of Revenue personnel will, of course, be glad to try 
to_fui»pi sfr y«Fany='#«p*te^i*4**f<wwatiA^^ ^fejw^^^^evgBuo Law .^-^ : 

101? -our^atft^ivtsttStTt ve ^r^ctic^Jas delated fo:ibarik£:.aiwl fsa'^ngssaiaiifel-iir^^^ : 
loans associations. 

I hope the four schedules we have prepared, and iny comments, will 
be of assistance. 

Again, I thank you. 



R-3 

'HM _ML,_. j<li i Wi iWi __L_,,E,-, -WU i L- - l -J.. Ill 



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01 « -M 



APPENDIX W /^^7^U.,^J~ ^ z-^^-- ^<:l^ 



COMPARISON OF STATE TAXES IMPOSED ON BANKS, 
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS 



This comparison presents in tabular form certain information on state 
taxation of banks, savings and loan associations, and credit unions with 
respect to the income and property of these institutions. It is appropriate 
in reviewing these taxes to point out that for many years Federal law 
determined to a great extent how the states taxed banks because of the 
restrictions placed on the states to limit their ability to tax national 
banks. Until 1969 there were very specific restrictions on the powers 
of states to tax national banks. The amendment of the Federal law in 1969 
removed these restrictions and today states may tax national banks as if 
they were state banks. However, Federal law does require that national 
banks must be taxed equally with state banks. Even though states have 
been given greater freedom to tax national banks, state tax laws continue 
to show traces of the old restrictions. 

Briefly, prior to the 1969 amendment, states were limited to the 
following options in taxing national banks: 

(1) bank share tax 

(2) corporate net income tax 

(3) excise tax measured by net income 

(4) personal income taxes on dividends received by bank shareholders 
The states could impose option (1) or (2) or (3), with option (4) 

being available for use with (2) or (3). Thus states could not impose 
both a share tax and a tax on, or measured by, net income. In complying 
with these restrictions, states usually taxed state banks the same as 
national banks since legislators understandably were inclined to treat 
the two groups the same. 



W-1 



2- 



Our first table distinguishes between the application of the "regular" 
corporation income and franchise taxes as opposed to specific taxes imposed 
on financial institutions. The presentation draws attention to the difference 
between a corporation net income tax that excludes from taxable income 
the interest received from United States bonds and/or obligations and an 
excise tax that is measured by net income including the interest from 
United States obligations. 

Our second table concerns property taxes and covers deposits in the 
institutions and the shares of banks taxed to the shareholders or banks. 
The tax on bank shares continues to be used as a significant form of bank 
taxation by some states. 

The principal source of the information presented in all tables is 
the Commerce Clearing House State Tax Reporters. These reporters provide 
considerable information, but can have serious limitations. Sometimes 
editorial comments are out-of-date and contradictory and questions cannot 
be satisfactorily resolved because the reprinted portions of the tax 
statutes do not cover the matter in question. 

Whenever tax information is condensed in tabular form, there is the 
risk of misinterpretations. However, to include all the necessary footnotes 
to assure complete reporting would make the tables cumbersome and less 
readable. The additional comments in the succeeding paragraphs help clarify 
the content of the tables and are provided in place of extensive footnotes. 
Corporation Income Tax . This section of Table 1 indicates the presence 
of a corporation net income tax whether or not applicable to banks or other 
financial institutions. Under this tax, interest on United States obligations 
would be deducted from income unless otherwise noted in the table. Maximum 
rates have been listed where a state has a schedule of tax rates. The 
notes have been used to afford additional rate detail. 



W-2 



-3- 
Corporation Franchise Tax . This section contains information on both the 
capital stock base (or related tax bases) and the net income tax base used 
to levy privilege or excise taxes on corporations. Financial institutions 
are shown as taxable in this section if there is no specific statute that 
separately imposes the tax on them. A franchise tax on net income would 
normally require the inclusion of interest income from United States 
obligations. 

Franchise tax Bases . The term "capital" has been used to denote bases 
that include additional items over and above the more limited bases of 
"issued and outstanding capital stock" or "authorized capital stock." The 
latter type base is entered as "capital stock." The entry "capital" covers 
a wide variety of approaches to taxing banks and was selected to avoid 
having a larger number of cryptic notes that might not identify the 
differences. Financial Institutions Tax . This section presents any type 
of tax specifically imposed on financial institutions under separate 
statutes, or imposed under the corporate franchise or excise tax law and 
described as "in lieu" of other named taxes. 

Notes . This section contains information which seems helpful in attempting 
to describe the overall tax picture. The notes are not "all inclusive" 
and do not necessarily cover all items or exceptions. 
Property Taxes . Information on property taxes has been summarized in 
Tables 2, 3, and 4. Table 2 contains information concerning those states 
that tax deposits, shares and/or other intangibles. Table 3 lists states 
that do not tax intangible personal property. Table 4 gives the tax 
treatment of tangible personal property of the financial institutions and 
points out the states that do not tax personal property. 

The tables do not cover real property taxes since the old Federal 
restrictions did not limit state taxation of real property. In reviewing 

W-3 



-4- 



the states' property tax laws, we found no special exemptions for financial 
institutions with regard to real property. 

Table 2 . This table shows the tax status of bank shares and deposits. 
From the information in the State Tax Reporters it was not always clear 
whether the institution or the shareholder pays the tax. In some cases, 
state laws may require the institutions to pay the tax on shares of 
nonresidents and the institutions may pay the tax for residents as well. 
Table 4 . In some states the exemption of tangible personal property for 
banks does not extend to property the banks lease to others. The table 
has not been noted as to when this condition applies. 
Credit Unions . The institutions were not always Identifiable in the tax 
laws. The tax status shown for some states is based on judgment concerning 
the Implications of certain definitions or certain provisions. In addition, 
we used another source other than CCH State Tax Reporters which we felt 
was reliable. The alternate source was a tax summary published by Credit 
Union National Association, Inc. 

Current Federal Restrictions . Federal law presently requires that the 
states and local governments tax Federal savings and loan associations 
at no higher rate than they tax state associations. Federal law prohibits 
the taxation of Federal credit unions except on their real and tangible 
personal property. 

Rates . Tax rates have been expressed as concisely as possible and not 
necessarily as quoted in the law. For example, a rate of one dollar per 
one thousand dollars is shown as one mill. 



North Carolina Department of Revenue 

Tax Research Division 

March 15, 1984 



V/-4- 






II I I 

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APPENDIX X 



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Y-2 



APPENDIX AA 



TABLE 3. STATES NOT TAXHIG IHTABGIBLE PEBSONAL PRO 



Alaska 

Arizona 

Azkansas 

Callfoxnla 

Colorado 

Connecticut 

Delaware 

Hawaii 

Idaho 

Illinois 



New Mexico 
New York 
North Dakota 
Oklahoma 
Oregon 

Bhode Island 
South Carolina 
South Dakota 
Texas 
Utah 



Iowa 

Maine 

Massachusetts 

Minnesota 

Missouri 

Montana 

Nebraska 

Nevada 

New Hampshire 

New Jersey 



Vennont 

Virginia 

Vashln^on 

Wisconsin 

Vjomiag 



Note: The above states exempt intan^bles from the 
property tax or tax only selected intan^bles 
under another type of tax auch as franchise 
or bankshares. 



AA-l 



IKBIB 4. TAXATION OF XANGIBLB PEH30JJAL PEDPERTY OF BANKS, 'ftuca.bl< 


SAVINGS AND LOAN ASSOCUTIONS AND CSEDlt UHIOBS 


Exempt 






Tanslble 


personal proaertv 




State 


Mnk« 


Savings and Loans 


Credit Unions 


Alabama 


T 




T 


Ex 


Alaska 


T 




T 


T 


ArlBona 


T 




T 


T 


Arkansas 


T 




T 


Bz 


California 


Ex 




Sx 


Sx 


Colorado 


T 




T 


Bx 


Connecticut 


T 




T 


T 


Delaware 


Ho personal property 


tax 




Florida 


T 




T 


T 


Georgia 


T 




T 


T 


Havaii 


No personal property 


tax 




Idaho 


T 




T 


ibc 


Illinois 


No personal property 


tax 






Ez 




T 


T 


Iowa 


T 




T 


T 


Kansas 


T 




T 


T 


Kentucky 


T 




Ex 


Ex 


Louiaiana 


Ex 




T 


Ez 


Maine 


T 




T 


T 


Maryland 


Ex 




Ex 


Ez 


Massachusetts 


Ex 


Mo 


reference 


Ez 


Michigan 


Ex 




Ex 


Ex 


Minnesota 


Ex 




Bx 


Bz 


Mississippi 


T 




T 


T 


Missouri 


Ex 




T 


T 


Montana 


T 




T 


T 


Nebraska 


T 




T 


T 


Nevada 


Ex 




T 


T 


New Hampshire 


Ex 




Ex 


Bx 


New Jersey 


T 




Ex 


T 


New MpxIco 


T 




T 


T 


New York 


No : 


personal property 


tax 




North Coi-ollna 


T 




T 


T 


North Dakota 


T 




T 


T 


Ohio 


Ez 




Ex 


T 


Oklahoma 


Ex 




T 


Bx 
T 


Oregon 


T 




T 


Pennsylvania 


No personal property 


tax 


Ex 
No reference 


Rhode Island 
South Carolina 


T 
Ex 




T 
Ex 


South Dakota 


No 


personal property 


tax 


T 

No. reference 

T 

T 


Tennessee 
Texas 
Utah 
Vermont 


T 
Ex 
T 
T 




T 
T 
T 
T 


Virginia 
Washington 


T 

T 




T 
T 
T 
T 
T 


T 
T 
T 


West Virginia 


T 




T 


Wisconsin 
Wyoming 


T 
T 




T 


1 taxable 


50 




34 


26 


exempt 


20 




15 


20 


no reference 


— 




1 


2 



AA-2 



APPENDIX BB yS^yfc . XJ.*.;..^^ ' ^ 

ANALYSES OF PROPOSALS TO REPEAL OR MODIFY THE INTANGIBLES TAX 

The CoflinUtee's request asked for two malyses pertaining to the 
Intangibles tax: 

1) the effect on state tax revenues arising from complete repeal 
of the Intangibles tax and 

2) the effect of repealing only the tax applying to money on 
deposit 

The second of the two proposals Is quite limited In Its scope 
and easiest to evaluate. The net decrease In revenue would be about 
12.3 million dollars which Is the amount of tax paid on such deposits 
by all taxpayers Including corporations, less the tax credits allowed 
to corporations on their franchise taxes. 

Individuals now pay the bulk of the 14.7 million dollars collected 
on such deposits and corporations having sufficient franchise tax lia- 
bility receive a complete offset for the tax by way of reduction of 
their franchise tax. Due to the credit, the tax on money on deposit 
has practically no Impact on corporations, and thus location decisions, 
I.e., Industrial development, would be unaffected by such a change. 
Individuals throughout the State would benefit by not having their 
accounts at banks charged with the amount of their Intangibles tax. 

The revenue loss for local governments would be felt evenly on 
a per capita basis, since the tax collected on this particular type 
of property is distributed on a per capita basis rather than according 
to the county from which collected. The tax rate on this property 
is the lower of the two rates applying under the intangibles tax. It 
Is doubtful that retired persons would regard removal of the 10^ per 
$100 as sufficient relief to change their views about the tax they 
regard as so burdensome. Well-to-do retirees contemplating a move 



1-1 



-z- 
to North Carolina Mould be more concerned with the ZSt rate Imposed 
o.n stocks and bonds. In brief » no significant nan revenues would 
likely be generated from repeal of the tax on deposits. State Income 
tax revenue would Increase through the lesser Itenlzed deduction taken 
taf taxpayers who claim intangibles tax as a personal deduction. 

Outright repeal of the Intangibles i«x Is a much more serious 
proposal measured In terms of lost revenue. Intangibles tax revenues 
amounting to $60,616,000 were collected in fiscal year 1982-83. Local 
govemnents received 93.3 percent of this revenue and the state retained 
the balance to cover the following: 

!) the tax credits allowed to corporations on their franchise 
tax liabilities for the Intangibles tax paid on their bank 
deposits 

2) cost of collecting the tax 

3) operating cost of the Ad Valorem Tax Division and the Property 
Tax Comnlssion 

4) expenses of the Property Tax Study Comal ttee 

Our discussion of full repeal is divided Into three parts with 
one part divided Into two separate sections. Our analysis covers the 
burden of the tax and the corresponding relief upon removal of the 
tax, the impact on local goverrments, and comments on the State's 
Industrial development and on In-migration of retirees. Following 
these three parts are a few brief concluding remarks. 

The Burden of the Tax and the Relief Afforded by Repeal 
The bulk of the intangibles tax burden falls on individuals. 
About 65 percent of the tax is paid by individuals who file singly. 
Jointly, or as partners. Their tax liabilities arise mainly from their 
holdings of shares of stock and their deposits in banks. 



-3- 

Corporatlons pay their Intangibles tax principally on accounts 
receivable and evidences of debt. Shares of stock and money on hand 
are the next most Important types of property on which corporations 
pay the Intangibles tax. 

Both individuals and corporations can claim their intangibles 
tax as a deduction in computing state and federal Income taxes. For 
Individuals in the highest state and federal tax brackets, their Income 
taxes could be reduced by more than 50 percent of the amotint of 1 n- 
tangibles tax paid if they Itemize personal deductions. Corporations 
paying the highest federal rate of 46 percent and the state 6 Percent 
rate would reduce their Income taxes by about 49 percent of the 
deduction. 

Excluding those who pay tax only on deposits, approximately 145,000 
individuals pay intangibles tax and about 26,000 corporations, other 
than banks, pay the Intangibles tax. The remaining taxpayers filing 
returns are primarily fiduciaries, either bank or non-bank. 

The average amount of tax paid by individuals filing singly or 
jointly was about $200 per return for fiscal year 1982-83. The average 
amount paid on partnership returns was more than double this amount, 
but we have no count of the nunber of partners represented by those 
returns and thus cannot compute the tax per individual. 

The average amount of tax paid by corporations was about $545 
for fiscal year 1982-83, and thus corporations paid about 14 million 
dollars in Intangibles taxes on returns. In comparison, corporation 
income taxes amounted to 306 million dollars and franchise taxes on 
business corporations (excludes public service companies) were 70 
million dollars. The Intangibles tax paid by corporations was less 
than 0.3% of their net taxable income. 



J- 3 



Admittedly these averages do not disclose the distribution of 
the tax burden and shed no light on the ni^bars of Individuals who 
may be paying substantial amounts of tax or the nunbers of corporations 
paying large amounts of tax on their receivables. The available data 
Indicate the total amounts of tax paid by type of property; the data 
do not show how many taxpayers paid tax on each type of property. For 
this reason the relief afforded by repeal can be described best In 
terms of types of property. Corporate businesses would be relieved 
of tax of about 7.5 million dollars on accounts re<%1vab1e. and about 
3.7 million dollars of tax on their money on hand and their evidences 
of debt. Further relief amounting to about 1.6 million dollars would 
be realized by not paying tax on their holdings of shares of stock. 
However, those corporations making a profit arK! Incwring state and 
federal income tax liabilities would experience some increase in income 
taxes, both state and federal, due to loss of the deduction. 

For individuals, the tax relief would be related to their investments 
in stocks and bonds and their deposits in banks. Individuals paid 
over 20 million dollars on their stocks and bonds alone in 1982-83. 
Repeal of the tax for these individuals would reeaove a particularly 
distasteful levy imposed on them by their state government. However, 
many of the taxpayers expressing their dissatisfaction in correspondence 
with the Department of Revenue are apparently unawarte that the revenue 
goes largely to the local goverrenents and is not a significant source 
of revenue for the state. 

Impact on Local Governments 
The local goverrmients received 51.3 million dollars from the 
intangibles tax distribution made in fiscal year 1982-83. When 



-5- 

related to total property tax levies, local sales tax, and amounts 
received from shared taxes, the Intangibles tax revenue distributed 
in fiscal year 1982-83 was 3 percent of their total revenues. If the 
Intangibles tax revenue Is related to the property tax levies only, 
it would be equal to about 4i percent for both the counties and the 
cities. 

The Importance of the Intangibles tax varies significantly between 
particular counties and to a lesser degree between cities. In counties 
with large property tax bases, the intangibles tax is less Important 
percentagewise as a source of revenue. For small counties with low 
personal income levels and fewer affluent residents, the tax is similarly 
less Important. 

Certain counties that have large numbers of retired persons realize 
significant revenue from the intagibles tax. Moore County derives 
revenue equal to 11 percent of its property tax levies; Henderson 
County receives an amount equal to about 12 percent of its property 
tax levies. Polk County's ratio is over 27 percent, making it the 
highest county in percentage of revenue derived from the intangibles 
tax. 

The towns and cities located in counties with relatively large 
Intangibles tax revenue also benefit since the counties share the 
revenue with their cities. For example, small towns in Moore, 
Henderson, and Polk Counties gain more revenue per capita from the 
intangibles tax than cities in larger counties, such as Mecklenburg, 
Wake, Durham, etc. 

Local governments would probably need to replace the lost revenue 
after repeal of the intangibles tax. If repeal was accompanied by 
provisions for state aid, there would be no need for raising local 
taxes unless the distribution of the aid did not reasonably conform 
to the present distribution of the intangibles tax revenue. 
BB-5 



If there is no satisfactory state aid and local property taxes 
are selected as the source of replacenent revenise, based on 1982-83 
fiscal year data, county rate Increases would average about 4 J percent 
with practically all counties falling within a range of 2 to 6 parcent. 
Variation in city rate changes would probably be somewhat greater. 

Industrial Development and In-Migration of Retired Persons 
It seems reasonable to conclude that certain Industrial prospects 
and retired persons would respond favorably to repeal by North Carolina 
of a tax which they perceive to be burdensome and also avoidable by 
locating in another state. To measure the real response to repeal 
is difficult, if not impossible, because there are no data available 
to show how many new plants were lost in the past or how many individuals 
chose another state over North Carolina solely because of the presence 
of the intangibles tax. If such data were available, possibly some 
realistic estimates might be prepared so that a comparison of estimated 
new revenues against lost intangibles tax revenues could be made to 
help weigh the merits of the proposal to repeal the tax. Despite the 
lack of specific data, an analysis of certain aspects may be helpful 
in evaluating the proposal. 

Industrial Develoianent . Clearly a manufacturer looking at our 
state would soon become aware of the intangibles tax and react negatively 
if he saw the tax as a real burden for his business. Even though we 
cannot say what the prospect's perception of the burden will be, we 
can try to determine how burdensome the tax is on our existing manu- 
facturing industry. A sample of large manufacturing companies in North 
Carolina shows their intangibles tax liabilities to be less than 0.1 
of 1 percent of their net income before tax. If smaller manufacturing 
companies have similar proportional liabilities, it seems doubtful 



-7- 

that industrial location decisions would hinge on this level of relative 
tax liability. Our industrial development program, though not limited 
to seeking manufacturing plants, does emphasize manufacturing and 
repeal would have to Influence this category of development to achieve 
substantial gains in State General Fund revenues. 

Apart from manufacturing, there is another area of ecoromic 
expansion the state seeks— headquarters locations of large manufacturing 
companies and also of financial institutions or companies, such as 
insurance and mortgage companies. Such large scale administrative 
or white collar operations may indeed be avoiding our state because 
of the intangibles tax, but the total tax revenue generated by these 
office operations is not comparable to that flowing from a manufacturing 
plant with the same nunber of employees. 

To what extent would our Industrial development program have to 
increase manufacturing employment to recover the lost intangibles tax 
revenue? Using our 1982-83 tax data from corporate income and franchise 
tax returns and insured employment data from the Employment Security 
Commission, it is estimated that about 13,000 new jobs would have to 
be added in one year to replace the annual Intangibles tax revenue 
paid by corporations alone. To replace all the lost revenue through 
increased industrial development would require more than four times 
this nimber of new manufacturing jobs. The average number of new jobs 
created annually over the past ten years through new plants and expansion 
of existing plants has been about 26,500. 

The 13,000 figure is based on rough estimates of the following 
taxes paid to the state by the compar\y and its employees: Income 
taxes, franchise taxes, and sales taxes. Other taxes were omitted 
and no adjustment was made to compensate for low or no income tax 



~8- 

payments by corporations during the start-up pertod or early years 
of operations. 

Retired Persons . In addition to stimulating industrial development, 
it has been suggested that 1n-ro1grat1o?i of retired persons would accelerate 
follcMing repeal and thereby add n^ revenues which would help avoid 
tax Increases. Census data from the 1980 Census Indicate that 
approximately 26.680 persons over 65 residing In Ndrth Carolina In 
1980 were living in another state in 1975. If this figure represents 
the rate at which retirees are now moving Into our state, we are now 
experiencing an annual in-mlgratlon of about 3,300 retirees over 65. 
This In-migratlon consists mainly of couples rather than single 
individuals and reflects about 3,000 new households annually. 
Whatever Influx of retirees one may expect from repeal. It would have 
to be evaluated by reference to the estimated current 1n-m1grat1on 
to make some Judgment about revenua effects. 

Without question, retired persons coming from other states where 
they have paid no Intangibles tax, find our tax objectionable. And 
they tell their friends back home about the tax. This word-of-raouth 
network would have to serve as a posltve factor to swell the tide If 
repeal became a fact and our new citizens would have to argue per- 
suasively to get old friends to join them here In large nunbers. 

What would happen if the in-migratlon doubled? Three thousand 
new households would bring in additional state sales tax revenue, 
income tax, cigarette, alcoholic beverage and soft drink taxes. The 
estimated range of state revenue from these new households could be 
from 4 to 5 million dollars^ If these estimates represent reasonable 
expectations, obviously repeal would have to bring about a much greater 
level of in-migration than the 5 to 6 thousand we now have coming in 



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each year. To sustain a much higher in-mlgration, the actual nijnber 
of persons outside North Carolina who will be retiring each year over 
the next several years would have to grow significantly and/or the 
inclination of retired persons (in the populous northern states) to 
move south would have to change markedly. The decision of a retiree 
to relocate would seemingly be dependent upon several factors, not 
just tax climate. 

Concluding Remarks 

From the foregoing analyses it is clear that replacement revenues 
would be required. Local revenues from new Industry and retirees would 
not be distributed evenly around the state to offset local losses of 
intangibles tax revenues. State revenues sufficient to replace the 
intangibles tax would not likely be developed in a short time, and 
it is questionable whether or not repeal would have the necessary 
dramatic effect on industrial development or on in-niigration of 
retirees to develop large additional state revenues. 

Intangibles taxes do not appear to be a serious burden on industry. 
With regard to individuals, the tax is perceived by retirees as a sig- 
nificant burden which is inequitable. Repeal could have a favorable 
effect on retirees' decisions to locate In North Carolina. However, 
North Carolina's personal income tax may be an equally discouraging 
factor for tax-sensitive senior citizens. Other southern states with 
which we compete have somewhat less burdensome personal income taxes. 

North Carolina's present industrial development program is 
attracting new plants from northeastern and midwestern states that 
do not have intangibles taxes. At the same time we are competing 
successfully with some southern states that do have intangibles taxes. 



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The question of equity arises whenever a particular tax Is to 
be removed end the possibility is considered of either imposing new 
taxes or raising rates on existing taxes. U111 repeal make our state's 
tax structure more or less equitable, or in fact be neutral? The Indi- 
vidual's answer to this question may be a decisive factor In determining 
his personal position on repeal. 



North Carolina Department of Revenue 
Tax Research Division 
March 15. 1984 



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